Given the recent bubble-like feeling, it’s useful to see where to hide if this is like dot-com era.
How did small cap value outperform?
1/ less crowded
Small cap value are less exposed to dot-com exuberance. Less impacted by fund inflow/outflow. Less exposed to leverage.
2/ interest rate cuts
In 2001, Fed cuts Fed funds rate target from 6.50% in 2000 to 1.75% in Dec 2001.
Small caps benefits more from rate cuts, as large caps already enjoyed low funding costs.
3/ cheap
Small cap value is better than small cap (Russell 2000) likely due to more margin of safety and little multiple downside (less dream value).
| Year | IWN / small-cap value | Russell 2000 |
|---|---|---|
| 2001 | +12.9% | +2.5% |
| 2002 | -11.4% | -20.5% |