Sizing Up Small Caps
Maximizing the benefits of owning small caps depends in part on how you piece the puzzle together.
A version of this article appeared in the August 2017 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.
Depending on which index provider's definition you rely on, small caps make up anywhere from 3% to 13% of the total investable market capitalization of the U.S. stock market. Looking outside U.S. borders, small caps account for 16% of the MSCI All-Country World ex-U.S. Index. At market weightings, this would amount to an allocation to U.S. small caps of roughly 1%-4% and about 5% to ex-U.S. small caps within a globally diversified, 60/40 stock/bond portfolio. This bit of context is important. Before making a big deal about small-cap stocks, it's imperative to remember that they represent a small slice of global stock markets and just a sliver of the global market portfolio.
Ben Johnson has a position in the following securities mentioned above: IJR. Find out about Morningstar’s editorial policies.