In case you hadn’t noticed, size matters to investors. By trying to match index returns, passive investing usually means buying the largest companies in the market. Similarly, mid-cap or small-cap exchange-traded funds (ETFs) are proxies for the returns of the biggest stocks below a certain size.
Active managers, while less restricted by questions of stock weighting, have a habit of thinking in terms of company size, too. Even if there is no explicit reference to size in an investment trust or fund’s name, managers are often marketed for their credentials as large-cap or small-cap specialists.
There are some good reasons for all of this. Because the ability to easily move in and out of portfolio positions can have a bearing on fund performance, and because the market size of a listed company tends to be correlated to its shares’ liquidity, large caps can be a benefit in and of themselves. Larger stocks are also often associated with lower volatility, and a wider breadth of analyst research.