12 July, 2020

Quora Answer: Why Do Small Capitalisation Index Funds Outperform Large Capitalisation Index Funds?


That is not necessarily true.  In fact, it is very unlikely.  Small capitalisation index funds appear to outperform large capitalisation funds in terms of percentage of the fund.  Mathematically, it is easier for a $1 million fund to double in size than a $100 million fund.  For example, if we say that fund A has $1 million capitalisation, and fund B has $100 million capitalisation.  Assuming in a period, fund A earned you $750,000, and fund B earned you $1.5 million in that same period, it looks on your fund report that fund A had an ROI of 75%, where fund B only had an ROI of 1.5%.  But we also have to consider the earnings in real terms, and the former earned you 50% of the latter.  Understandably, this is a simplistic example to illustrate the point.  In the real world, we cannot look at these indicators in isolation, but we have to see them within that market context.  There is a place in your portfolio for both.



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