The Investment Scientist

Small Cap Value: Risk and Returns

Posted on: March 29, 2011

If you invested $1 in the small cap value index at the beginning of 1927, you would have had $52,892 by the end of 2010. This is according to the recently published Dimensional Fund Advisors’ annual Matrix Book. Included in the book are historical risk and returns of various indices based on capitalization and book-to-market valuation.

Table 1 presents a summary of historical returns. The best returns are marked in green; the worst, marked in red. As one can see, the small cap value index is the best for all the periods considered. And it is the best by a huge margin.

Table 1: Small Cap and Large Cap Historical Returns

1 y 2010 5 y 2006-2010 10 y 2001-2010 20 y 1991-2010 50 y 1961-2010 80 y 1931-2010
Small Cap Value 34.6 4.8 13.8 15.6 15.3 15.4
Large Cap Value 20.2 -3.7 -0.1 8.2 11.4 11.2
Small Cap Growth 31.8 3.4 3.0 8.2 8.2 10.2
Large Cap Growth 17.6 3.9 -0.4 8.5 8.9 9.4

There are two possible explanations for this:

1. Small cap value is more risky

2. Investors systematically undervalue small cap value

Academics tend to accept 1) while practitioners tend to argue for 2). Let the data be the final arbitrator.

In Table 2, I sum up the worst 1-year, 5-year, 10-year and 20-year returns of the various indices and use them as proxies for risk. I then use red to mark the most risky index and green to mark the least risky in a given period. One can see, the small cap value index is the most risky for all durations except one.

Table 2: Small Cap and Large Cap Historical Risk

Worst1 year Worst5 years Worst10 years Worst20 years
Small Cap Value Index -60.6 -24.9 -7.5 2.4
Large Cap Value Index -53.1 -21.7 -5 3.3
Small Cap Growth Index -45.1 -19 -2.5 2.0
Large Cap Growth Index -43.7 -15 -4.1 3.0

This proves once again that risk and rewards go hand in hand. Put it in layman’s term, the better you can put up with short term drop, the more you will earn long-term returns.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

32 Responses to "Small Cap Value: Risk and Returns"

Nice presentation. I’d like to see the same sort of data for high dividend versus no dividend. It seems to me that there are bloggers who believe that dividend stocks always outperform. This data seems to contradict that because we would expect large cap to pay healthier dividends than small cap.
Just a thought.

DIY investors,

I actually did some work on comparing high dividend stocks to no dividend stocks as well. Results confirm that:

1. Dividend stocks tend to outperform in the long run.
2. During the great depression, they fell slightly less.

So it appears that they are less risky and more rewarding. Academics have tried to come up with explanation:

1. Tax explanation: Dividends are taxed at marginal income tax rate (for the most part of history), investors, who are mostly wealthy folks, valued dividend stocks accordingly. Therefore their before tax returns look higher.
2. Agency explanation: the biggest lost of value to a successful public company is empire building, by returning cash to investors, firm managers commit to discipline themselves from empire building, resulting in higher returns.

If you notice, explanation 1 is an efficient market explanation; explanation 2 is an inefficient market explanation.

In case you are interested, this is my old post about dividends and the great depression.

I’m curious, what is the index you refer to for the small cap value index, small cap growth index, large cap growth index and the large cap value index in your blog above?


These are indexes used in Dimensional Fund Advisor’s Matrix Book. Their indexes are based on prof. Fama and French’s stock classification. You can read their orignal work: The Cross-Section of Expected Stock Return to learn more.


Do you know what the break off point is for the market cap that DFA uses? For example, if it includes the 1345 stocks below $100MM in market cap, than it’s misleading because those companies typically have very thin trading as well as enormous spread differential making it very difficult to trade. If,however, the market cap definition that DFA uses begins at say, $100MM or even $75MM, then it would seem to be a fair comparison. Nevertheless, it’s very interesting and thanks for posting.


That’s a fantastic question! I have always assume they (DFA) use fama french’s breakpoints. You can find them in their data library:

The liquidity issue you raised I have a good answer. DFA is known for providing liquidity among exchanges for small cap illiquid stocks. I have a former colleague who works at one of those exchanges and he told me when a money manager wanted to unload a big chunk of illiquid stocks, they generally called up DFA and DFA would take those stocks for a good discount.

This can happen because DFA’s philosophy that those money managers are no smarter than the market, so long as the discount is big enough, there is no risk of taking what they don’t want. No other money management firms are like that, not even Vanguard. I would say DFA is the only one who actually make money from thinly traded markets.

Thanks, Michael. The data library is very helpful. Appreciate the posting. Do you think that since small cap value has had such a good run of late, that the party’s over and large caps will prevail for the next few years? I’ve seen some other insights you’ve posted and the longer term returns, post-recession, for SCV are rather impressive but in a tepid economic environment, will this continue or should we be prepared for some volatility? thx.


I believe the return premium SCV command over LCG will persist, I discuss it here:

As to the next few years, it’s impossible to predict, the longest stretch of SCV underperformance is 3 years, the longest stretch of SCV outperformance is 7,8 years. As it is a RISK premium, it is impossible to predict when the stretch will begin or end. I wrote about the odds of SCV underperformance here:


Thx. for the links. Interesting stuff and you and Fama/French make a good long-term case for SCV. I enjoy reading these comments because they are academic in nature and basically give you the facts. Pls. keep posting the SCV research as time permits as I find it fascinating. Dakahuna

Thanks Dakahuna for the kind words. In fact the case for SCV is stronger than I had been able to make. One thing I never wrote about is the diversification benefit of SCV. It turns out the global large cap stocks largely move in tandem, so holding US large cap and European large cap has little diversification benefit. Not so with small cap, esp SCV. The correlations of SCV stocks of different markets are much lower since SCV stocks are not mostly driven by local factors instead of global ones.

Michael-thank you. That’s a good topic for a future column, perhaps. You should really be in academia. Seems to be where you thrive the most. Deep-diving on things most of us can’t get our hands easily around.


Thanks for the kind words. I tried academia and found I am not an ivory tower type. Deep down I am an entrepreneur with much intellectual curiosity.

That’s a good combination–intellectual curiously and entrepreneurial vision and drive. Keep it up.

Michael…you referred to a Matrix Book published recently. Is that available for reference? thx.


I have the physical book published by DFA. I am not sure if there is any soft copy out there,.


Thanks, Michael. I will do a search for it. I’m going to be anxiously awaiting your Recession and stock market performance metrics updates.

Michael….small cap value is now down 28% from the top this year. I would be curious to see your historical SCV stats coming out of recession updated. thx!

I will do an update one of these day.

Thx. Michael. The data seem a bit ambiguous on whether we are heading back into another recession. They come and they go but I would not be out of SCV….It’s volatile as the past five months have clearly demonstrated, but that’s not unusual as your research suggests.


I don’t think it is heading into another recession, economic data does not show that. There is a psychological effect called “recency effect.” It basically says when people assign probability of future events, they will assign a very heavy weight to an event that just happened. We just had a recession, people therefore tend to over-estimate the probability of recession. This is just human nature.


Hey Michael…Hope all is well. Can you update the Small Cap Value performance when it’s convenient. I believe it’s been about three years so I would be curious as to how the SCV has done relative to other periods in history. thx.

I’d like to share a penny stock site that I’ve been using for the past several years. I have to admit they’re actually very good! They’ve been supplying penny stock picks for many years on the web and I certainly suggest using them in case you are trading these kinds of stocks. Check out their internet site: and look around.

Small cap value investing is patently different from speculation in penny stocks. Many penny stocks are traded in under-regulated OTC markets, you should avoid them all together. To earn small cap value premium, the best way is to buy a Vanguard or DFA small cap value fund.

Hello Michael….Any chance you have time to update your SCV calculations? I would be very interested to see the update post-recession.

Hey Michael. I know that you’re busy but I think people would benefit from one of your periodic updates on Small Cap Value. It’s obvious it’s done very well and would be educational for people to see that once again, staying invested in small caps, despite some volatility, can help add to long term returns. Thx!


I am extremely busy, but I will get my assistant to do it.


Hey Michael…I know you’re busy but any chance to update the SCV since the end of the last recession? thx. Dakahuna

Will get one of my assistant to do that on Wed.

Best regards,

Michael. I think it will illustrate some points you made many years ago on this site: SCV, coming out of recessions, has done very very well. This time has been no different. Hope all is well.

Michael. Do you have time to update the Small Cap Value performance since the recession ended? Thx.

Hi Michael—I was interested to see if you could update your Small Cap Value “post-recession” investment performance? It’s been almost eight years now since the last recession ended. We’ve only had two small down years in SCV since the bottom in 2009 so I’m sure the performance has been pretty good as per your research. Thanks and hope you’re doing well!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


%d bloggers like this: