98 Years of US Small Cap Value Premium Over S&P 500

I have a comment who tried to rub it in for the recent poor performance of my US small-cap value-weighted fund and request for some weird research that I can never do and would never be helpful.

But I would take this opportunity to record some notes regarding the premium of small-cap value over the large-blend index.

I didn’t overly sell the small-cap value concept as others in the past, but this article shows how much premium US small-cap value had over the S&P 500. We will use Dimensional’s US Small Cap Value Research index as a proxy. I have also did the data work with the Fama-French Small Value Research Index, which will show the same conclusion, but I will not show the data here.

You will be able to see over the past 98 years in US, the pessimistic cumulative return, the premium of small-cap value over large-blend index, number of negative years, the median premium.

Five-Years Rolling Return from Jun 1927 to Jan 2023

There are 1089 five-year periods we can extract return data.

I will give you the 25th percentile five-year cumulative return because the 25th percentile is a pessimistic/unlucky investor return. The 50th percentile is the median.

• Dimensional Small Cap Value Index: 53.5%
• S&P 500: 29.9%

Percentage of periods where returns were negative (there are 1089 periods):

• Dimensional Small Cap Value Index: 9.9%
• S&P 500: 11.3%

Here is the value + small premium over large + blend:

The median premium of small-cap value over S&P 500 is 16.4%.

Negative means that S&P 500 did better than the US small-cap value over those five years. You can observe that throughout history, there are these periods where returns are lower.

But there are some crazy periods where the small-cap value did 400% better than the S&P 500.

Ten-Years Rolling Return from Jun 1927 to Jan 2023

There are 1029 ten-year periods we can extract return data.

The 25th percentile ten-year cumulative return:

• Dimensional Small Cap Value Index: 202%
• S&P 500: 98%

Percentage of periods where returns were negative (there are 1029 periods):

• Dimensional Small Cap Value Index: 3.9%
• S&P 500: 5.2%

Here is the value + small premium over large + blend:

The median premium of small-cap value over S&P 500 is 107%.

There are fewer negative premiums.

There are many ten-year periods where the premium over S&P 500 is 200%.

Fifteen-Years Rolling Return from Jun 1927 to Jan 2023

There are 966 fifteen-year periods we can extract return data.

The 25th percentile fifteen-year cumulative return:

• Dimensional Small Cap Value Index: 550%
• S&P 500: 182%

Percentage of periods where returns were negative (there are 966 periods):

• Dimensional Small Cap Value Index: 1%
• S&P 500: 0.2%

Here is the value + small premium over large + blend:

The median premium of small-cap value over S&P 500 is 428%.

Twenty-Years Rolling Return from Jun 1927 to Jan 2023

There are 906 fifteen-year periods we can extract return data.

The 25th percentile twenty-year cumulative return:

• Dimensional Small Cap Value Index: 1258%
• S&P 500: 368%

Percentage of periods where returns were negative (there are 906 periods):

• Dimensional Small Cap Value Index: 0%
• S&P 500: 0%

Here is the value + small premium over large + blend:

The median premium of small-cap value over S&P 500 is 1000%.

The more I look at the data, the more I agree equities are more like a twenty-year duration “bond”. This means that if you buy-and-hold shorter than twenty years, you may be unlucky to be negative. This is just like holding twenty-year treasury bill and then interest rate rise from 0.5% to 4% and you have a large unrealized loss.

If you hold the twenty-year treasury bill for 20-year, you should be ok.

The interesting thing is…. as returns of both S&P 500 and Dimensional Small Cap Value Index are all positive, EVERY TWENTY YEAR PERIOD, the Small Cap Value did better than all S&P 500 index.

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Here are some other good articles on index investing.

I do have a few other data-driven Index ETF articles. These are suitable if you are interested in constructing a low-cost, well-diversified, passive portfolio.

You can check them out here:

1. IWDA vs VWRA – Are Significant Performance Differences Between the Two Low-Cost ETFs?
2. The Beauty of High Yield Bond Funds – What the Data Tells Us
3. Searching for Higher Yield in Emerging Market Bonds
4. The performance of investing in stocks that can Grow their Dividends for 7/10 years
5. Should We Add MSCI World Small-Cap ETF (WSML) to Our Passive Portfolio?
6. Review of the LionGlobal Infinity Global – A MSCI World Unit Trust Available for CPF OA Investment
7. 222 Years of 60/40 Portfolio Shows Us Balanced Portfolio Corrections are Pretty Mild
8. Actively managed funds versus Passive Peers Over the Longer Run – Data
9. International Stocks vs the USA before 2010 – Data
10. S&P 500 Index vs MSCI World Index Performance Differences Over One and Ten Year Periods – Data

Here are some supplements to sharpen your edge on low-cost, passive ETF investing:

1. Can You Better Time Your Annual Investment Base on Market Seasonality?

Those who wish to set up their portfolio to capture better returns believe that certain factors such as value, size, quality, momentum and low volatility would do well over time and are willing to harvest these factors through ETFs and funds over time, here are some articles to get you started on factor investing passively:

1. Introduction to factor investing / Smart Beta investing.
2. IFSW – The iShares MSCI World Multi-factor ETF
3. IWMO – The iShares MSCI World Momentum ETF
4. GGRA – The WisdomTree Global Quality Dividend Growth UCITS ETF
5. Investing in companies with strong economic moats through MOAT and GOAT.
6. Robeco’s research into 151 years of Low Volatility Factor – Market returns with lower volatility that did well in different market regimes
7. JPGL vs IFSW vs Dimensional Global Core vs SWDA – 22 years of 5-year and 10-year Rolling Returns Performance Comparison
8. 98 Years of Data Shows the US Small Cap Value Premium over S&P 500
9. 42 Years of data shows that Europe Small Cap Value premium over MSCI Europe

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