The incredible outperformance of large-cap companies relative to their small-cap peers of late has been mind-boggling for conservative long-term fundamental oriented investors such as myself.
Traditionally, smaller cap companies have higher returns over the long-term due to the slightly riskier nature of these companies’ business models, and the higher growth potential over the long-term. Of late, mega-cap companies valued in the hundreds of billions or trillions of dollars have been granted long-term growth rates that are higher, in many cases, than the potential growth rates of small cap stocks.
This discrepancy has led to a valuation gap between large and small caps, the likes of which I haven’t seen in my investing career. I think there’s significant potential for a rebound in small cap stocks, to at least close the valuation gap that exists today.
I think this sort of large-cap outperformance is not tenable over the long-term, so some sort of reversion toward the longer-term mean is necessary.
In this context, I think one exchange traded fund (ETF) that provides excellent leverage to a small cap rebound is the Vanguard Small Cap Value ETF (TSX:VBR). This ETF looks at companies on the basis of not only their market capitalization, but also whether or not these companies tilt towards value, a very good orientation to have right now, in my view.
This is a low-cost fund that is broadly diversified and is one of the best and easiest ways for investors to gain some small cap exposure, particularly if investors are too heavily weighted toward large cap companies right now.
Invest wisely, my friends.
