How Small Is Your Small-Cap Index?

After Donald Trump’s presidential election victory on November 8, 2016, U.S. small-cap stocks enjoyed a significant upward move. We believe further interest is justified in the following scenarios:

If there is corporate tax reform, we’ve found that small-cap stocks do in fact tend to pay higher effective tax rates than large-cap stocks. If the statutory rate for U.S. corporations is lowered from the current 35% to 25% (or lower), the biggest incremental impact could hit profitable, small-cap companies.

If U.S. Federal Reserve (Fed) policy does lead to a stronger U.S. dollar, small-cap stocks, which garner most of their revenues from within the U.S., as opposed to exports, could see less of a headwind to their competitiveness than large caps, which tend to be much more globally oriented.

But What Is a Small Cap?

Interestingly, there are no universally accepted definitions for large caps, mid-caps or small caps. WisdomTree often defines its small-cap Indexes using a concept that determines the percentage of total market cap of its respective universes. For reporting purposes, we also broadly categorize size according to the following classifications: Stocks with market capitalizations below $2 billion constitute small caps, while stocks between $2 billion and $10 billion constitute mid-caps and stocks above $10 billion constitute large caps.

How Different Are Commonly Followed U.S. Small-Cap Indexes? (data in millions)

Weighted Avg Market Cap of Small Cap

For definitions of indexes in the chart, visit our glossary.

A Key Size Metric

Weighted Average Market Capitalization: This is an important metric to consider in that it combines the actual market capitalization size of the firms with the weighting mechanism of the Indexes. The WisdomTree SmallCap Earnings Index is weighted by earnings, whereas the WisdomTree SmallCap Dividend and U.S. SmallCap Quality Dividend Growth Indexes are weighted by dividends. Stocks that are 1) included and then 2) weighted more highly would have the greatest influence.