Factor Returns: Small vs Large Caps

Are Factor Returns Limited to Small Caps?

October 2017. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • A frequent criticism of factor investing is that factor returns are stronger in small caps
  • Our research highlights that this is not uniformly true across factors
  • Value and Size benefit most from including small caps


Factor investing can be challenged in many ways. Nearly all of the research is based on backtesting of financial data, not on realized returns. The few factor products that have a live track record of close to 20 years show significant differences to the theoretical returns (please see our research report Smart Beta vs Factor Returns). Transaction costs are typically excluded from research, which tend to have meaningful impact in reality. Fama-French data, a great free resource, which we often use in our analysis given that the data goes back to 1926, includes companies with very small market capitalizations. The later criticism, i.e. that the stocks used in research need to be investible is important for institutional investors as they are often constrained from trading companies with too small market capitalizations. In this short research note we will analyse the difference in factor returns for companies with small and large market capitalizations (“caps”) (try Finominal’s Alpha Analyzer for a factor exposure analysis).


We focus on the six well-known factors (Value, Size, Momentum, Low Volatility, Quality & Growth) in the US. The factors are constructed as beta-neutral long-short portfolios by taking the top and bottom 10% of the stock universe in the US. The analysis covers the period from 2000 to 2017 and includes costs of 10 bps per transactions.

As of mid 2017 our universe of US stocks includes 1725 stocks with a minimum market cap of $1bn and a median market cap of $4bn. We divide this universe equally and as a result derive a small and a large cap universe. The median market cap of the small cap universe is $2bn compared to $11bn for the large cap universe.


The chart below shows the