Addressing the Lower Liquidity of Smaller Stocks

Raina OberoiAna Harris

July 7, 2021


Despite the potential benefits of investing in small-cap stocks, investors often worry about liquidity, ease and ability to trade, at the lower end of the market-cap spectrum; specifically, costs (the scarcer the asset, the higher the cost) and access (how easy is to find a seller or a buyer).

Investability and tradability, are two vital touchstones of our Global Investable Market Indexes (GIMI) construction methodology. The number of days it would have taken to replicate indexes that consist of large- and mid-cap stocks (e.g., the MSCI World and MSCI USA Indexes) and indexes that consist of small caps (e.g., the MSCI World Small Cap and MSCI USA Small Cap Indexes) has been very low (no more than three days in the case of global small-cap stocks). Assuming a maximum daily trading limit of 20%, hypothetical portfolios aiming to replicate the small-cap indexes would have taken longer to trade than those seeking to replicate the large- and mid-cap indexes, but only by a matter of a few days. Actually, in the case of the MSCI USA Indexes, it would have taken less than a day to complete 95% of a USD 1 billion index-tracking portfolio for both indexes, regardless of market cap.

The GIMI framework screens out the smallest, micro-cap stocks from the MSCI Small Cap Indexes, helping ensure that stocks that are not liquid enough or do not have enough shares available for purchase by foreign investors not included. cap stocks.

Outside the GIMI framework, however, we maintain a series of micro-cap indexes to ensure investors have access to extensive coverage of the market as these companies grow in size and potentially migrate to the small-cap indexes. That said, as shown below, lower levels of liquidity would make it more challenging to build an indexed portfolio in the micro-cap space.

Interactive Assets

Addressing the Lower Liquidity of Smaller Stocks

Days to Trade 95% of an Index-Linked Hypothetical Portfolio

MSCI World

‹1 day

MSCI World Small Cap

2-3 days

MSCI World Micro Cap

14+ days


‹1 day

MSCI USA Small Cap

‹1 day

MSCI USA Micro Cap

9+ days

Average of last four MSCI Semi-Annual Index Reviews ending March 31, 2021, and assuming a fund size of USD 1.0 bn and a maximum daily trading limit of 20%.

chart 25 - related content