By Choice, Not by Chance: Small and Mid Caps in Portfolio Construction

Research Paper
Ketaki Garg, Vasu Sharma
September 30, 2026

Mentioned in this paper:

MSCI World Large Cap Index | MSCI World SMID Cap Index | MSCI Global Investable Market Indexes (GIMI) Methodology

Preview

Small- and mid-cap (SMID) companies make up most of the world’s listed companies, but only a small slice of a typical large-cap benchmark. In this paper, we treat a SMID allocation as a dial rather than a switch — the question is less whether to hold these companies and more how far to turn the dial. Combining SMID caps eases the liquidity and capacity constraints of a small-cap-only allocation, and a 20%-40% SMID share captures most of the reduction in concentration and gain in breadth without materially raising risk. We also present an indexed approach, built around roughly 300 constituents, designed to make that allocation easier to implement.

Small and mid caps eased liquidity and capacity constraints 
Grid of six bar charts titled "Combining mid and small caps eased the liquidity and capacity constraints of a pure small cap allocation," comparing Small, Mid and SMID size segments. Top row (Developed Markets): (1) Days to trade vs. cash, 95th percentile: 0.33 days for Small, 0.25 for Mid, 0.15 for SMID; (2) Annualized one-way index turnover: 17.7% Small, 16.4% Mid, 9.0% SMID; (3) Index capacity (float market cap ownership, 95th percentile): 0.009% Small, 0.007% Mid, 0.004% SMID. Bottom row (Emerging Markets), same three metrics: (1) Days to trade: 2.45 Small, 1.61 Mid, 1.05 SMID; (2) Turnover: 26.4% Small, 33.0% Mid, 21.4% SMID; (3) Index capacity: 0.056% Small, 0.041% Mid, 0.024% SMID. Key takeaway: the SMID segment has the lowest value in all six panels, making it consistently the most liquid and scalable of the three size segments in both developed and emerging markets. Source: MSCI IndexMetrics, period Dec. 29, 2000 - Jun. 30, 2026, assuming a USD 1 billion fund with a 20% maximum daily trading limit.

Period: Dec. 29, 2000 – Jun. 30, 2026. Days to trade relative to cash at the 95th percentile, assuming a USD 1 billion fund and a 20% maximum daily trading limit.

Ketaki Garg
Ketaki Garg
Executive Director, MSCI Research & Development
Vasu Sharma
Vasu Sharma
Analyst, MSCI Research & Development

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