How To Access Shareholder Yield In U.S. Small Caps

In U.S. equities, investors love the idea of small-cap stocks. Some of these companies represent the entrepreneurial spirit, and it’s no secret that many investors dream of the “lottery-like” experience of finding the next Facebook, Amazon, Netflix or Google before it becomes a giant company—collecting stratospheric returns along the way.

More Realistic Strategies in U.S. Small Caps

Of course, the chance of finding such blockbuster firms early in their life cycles is extremely low, and we think it would be difficult for most investors to build strategic allocations with that type of thinking. Fortunately, history has shown that certain characteristics of U.S. small-cap stocks have been associated with long-term outperformance.

One tilt that has been associated with stronger returns is U.S. small caps that are buying back their shares—and it’s notable that traditional market capitalization-weighted benchmarks miss it.

Net Buybacks: Beneficial/Highest Net Issuance: Significantly Lower Returns

Net Buyback By Segment

The highest return (darkest shade of green) was found in the smallest companies with net buybacks. While the small cap or “size” premium has been followed for many years, newer thinking seeks to mix the concept of focusing on small stocks with other factors, such as quality. One avenue through which to create a small-cap exposure with high quality is small stocks that are buying back shares.

Also noteworthy is that, across all the size segments, the worst returns were in those stocks with the highest share issuance. We think it could make a lot of sense—whenever thinking about a U.S. equity exposure—to at least be aware of the net buyback ratio of that exposure to try to avoid those firms that are issuing the most stock.

Market Capitalization-Weighted Small-Cap Indexes Miss This Focus

Market Cap of Small Cap Indexes