Size Factor

The Size Factor is the historical tendency for small-capitalization companies to outperform large-capitalization companies over long time horizons.

In factor models like the Fama-French Three-Factor Model, it is often referred to as SMB (Small Minus Big). The core idea is that smaller companies have more room to grow and represent higher risk, therefore compensating investors with a higher expected return.

While the size premium has been questioned in recent years due to underperformance compared to mega-cap tech stocks, research shows that when combined with the Value Factor (Small-Cap Value), the premium remains statistically significant and robust.

Many quantitative portfolios allocate specifically to small-cap value ETFs to boost expected returns without increasing overall equity exposure. This allows for larger allocations to safe assets like bonds without sacrificing growth.