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One Size Does Not Fit All: Understanding Factor Investing

The size premium has been widely used in asset allocation and in risk models for decades. However, some academics and practitioners have contested the validity of the size premium. They argue: 1) the size premium has disappeared in the last 20 years and no longer exists; 2) the size premium exists only in the United States and not in other markets; 3) the size premium disappears after filtering out smaller stocks for investability. In this paper, we refute these claims and examine ways of implementing the size premium. Notably, there is a “sweet spot” along the all-cap spectrum that can be used in constructing “smarter” size-based portfolios.