By Catherine Yoshimoto, director, product management
When US equity markets reached the bottom one year ago at the onset of the pandemic, US microcap stocks were dealt a particularly sharp blow. They subsequently rebounded alongside all US equity market cap segments, but their performance continued to lag their larger size segment counterparts—until the events of early 2021 when US microcaps soared above the rest.
Small but not insignificant
The Russell Microcap Index consists of the smallest stocks in the Russell 3000E Index, and represents less than 2% of its total market cap. But despite comprising just a small fraction of US equity markets, US microcaps have garnered growing attention from investors in recent years. US microcap assets under management have risen by 33% over the past five years, reaching $25 billion at the end of 2020.
The potential for diversification benefits has been one of the key reasons behind the growth of microcap investing—particularly when it comes to portfolios with high allocations to large-cap stocks. As shown below, US microcaps have exhibited lower correlations to large and mega cap stocks over the past five years, offering the potential for added diversification.
The pandemic and the trough
Many investors have also sought microcaps for their alpha generation potential, but this was hardly a feature of US microcaps during the March 2020 market turmoil. While the early days of the pandemic took a widespread toll across US equities, microcap performance was hit hardest. As shown below, the Russell Microcap Index was down 43% year-to-date as of March 18, 2020—the most pronounced dip of any US equity size segment.
The Reddit trading craze and the peak
The graph above also demonstrates that not only did the Russell Microcap Index fare the worst during the March 2020 market downturn, but its YTD performance continued to lag other size segments through the end of the year. However, the events of early 2021 led to a significant reversal of fortune for US microcaps.
In January 2021, users on Reddit forums collaborated to buy shares and call options in companies where hedge funds had large short positions. The concerted effort was a success, and the phenomenon’s biggest target was Gamestop, a video game retailer whose market cap skyrocketed from $1.3 billion at the end of December to nearly $28 billion at the end of January. The stock’s dramatic rise not only bolstered Russell 2000 Index performance, but also gave a considerable boost to the Russell Microcap Index, contributing 259 basis points to its YTD performance as of March 19, 2021 and securing the spot of its largest holding by a longshot. (The stock itself was classified micro in late 2020.)
This time period marked a turning point for US microcaps, where its YTD 2021 performance surpassed all other size segments. As shown below, the recent surge has not only made the Russell Microcap Index the top YTD performer, but it’s also outperformed other US equity size segments for the trailing one-year period ending March 2021.
The relative performance can be observed in global equities as well, with the FTSE Global Micro Cap Index and FTSE Global Small Cap Index leading their large/mid counterpart FTSE All-World Index.
An eventful year in the rearview
It remains to be seen whether or the retail money events will endure. But what’s certain is they added another chapter to an already eventful one-year period for US microcaps—a chapter that materially altered the trajectory of their performance.
Subscribe to the blog.
 Source: eVestment, data reported as of February 15, 2021
© 2021 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.