Why include small-cap in a portfolio?
Another way to think about the elements of portfolio construction is to consider market capitalization (the total number of outstanding shares multiplied by the share price). Though the actual market cap ranges—micro-, small-, mid-, or mega-cap—it is generally accepted that stocks with smaller capitalizations are more growth oriented, and less likely to pay dividends, due to the nature of the underlying business.
Because many smaller companies are in high growth industries, or new technologies, small-cap exposure can enhance portfolio diversification when added to a mix of larger capitalization stocks.
Portfolio applications for small-cap
Investors may choose to employ a strategic allocation to small-cap to position a portfolio for the potential long-term growth and diversification benefits. Because smaller companies are often leaner and less established than their large-cap counterparts, this asset class is considered more volatile and can potentially be a tactical solution for navigating changing economic times.