When US equity markets reached the bottom one year ago at the onset of the pandemic, US microcap stocks were dealt a particularly sharp blow. They subsequently rebounded alongside all US equity market cap segments, but their performance continued to lag their larger size segment counterparts—until the events of early 2021 when US microcaps soared above the rest.
The potential for diversification benefits has been one of the key reasons behind the growth of microcap investing—particularly when it comes to portfolios with high allocations to large-cap stocks. As shown below, US microcaps have exhibited lower correlations to large and mega cap stocks over the past five years, offering the potential for added diversification.
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