Small Stocks Were Supposed to Win

Academic research says smaller companies should outperform over time. Thirty-five years of Vanguard fund returns tell a more complicated story.

You probably haven’t heard of Rolf Banz of the University of Chicago, but he was the first academic to identify the “size effect”—that small stocks beat larger stocks—in 1981. (Technically, Banz was looking at risk-adjusted returns, but let’s keep it simple.) Though arguably, it was Fama and French’s 1992 paper that turned the small-stock advantage into accepted wisdom.

So, would following the academics’ lead three decades ago have led to market-beating returns? Asked differently, could you have outperformed 500 Index (VFIAX) by simply gritting your teeth and holding SmallCap Index (VSMAX)?

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