In many ways, the Size Factor is easier to understand how it impacts portfolio performance. Very simply, small-cap stocks, as a whole, outperform large-cap stocks. However, small-cap growth stocks lag market returns. This will lead into Factor 3, but that is getting ahead of the story. The first market factor is Beta. The second critical factor is Size and that is why we want to include an ETF, such as SCHA, in the investment quiver. SCHA is Schwab’s U.S. Small-Cap Equities ETF.
Eugene Fama and Kenneth French were among the first to recognize the significance of size. When the Factor Portfolio is presented, you will find addition small-cap ETFs among the offerings.
Warning: Small-cap stocks tend to be of lower quality and that is why we will also be including another factor.