Size Factor

Everyone hears the same line when they start out. Smaller companies pay you more, so go down the cap ladder for the bigger number. It sounds like a law of nature. I decided to run it on our own shelf instead of trusting the folklore.

Four tiers, same backtest engine, equal weight, same fortnightly rebalance. The only thing changing was the size band.

The bigger number never turned up. Midcap did 41.21 a year. Smallcap 41.03. Microcap, scraping the very bottom, 40.56. That is the whole return ladder, and it is flat. If anything it tilts down as you shrink.

Then look at what it cost you to stand on each rung. The worst drop went 24.87, then 22.35, then 26.44. Microcap dug the deepest hole of the lot for the smallest payout. Depth is not a return promise. It is just depth.

The line that actually stung was the comparison nobody frames this way. The everything-basket, all caps mixed together, did 48.02 a year with a shallower worst drop than any pure size tier and the best Sharpe of the group. Concentrating into "small" handed back roughly seven points of return. The diversification you were told to skip was the part that paid.

None of this means small caps are bad. It means "small" on its own is not an edge. The size premium is the flakiest factor in the book. Banz found it in 1981 and it began fading almost the year it was published. A 2018 study pulled it apart and found the honest version. Strip out the junk, the broke and the bleeding tiny names, and a real premium shows up. Leave the junk in and it disappears.

So the edge was never how small you went. It was how carefully you picked once you got there.

How a rule filters the band it fishes in: rupeecase.com/learn/

Past performance is backtest only and not a guarantee.