In part 1 of this article, we examined how value and low volatility factors have worked among smaller-cap stocks. In part 2, we will examine the momentum and profitability factors.
Momentum
Momentum has also tended to offer the best returns among the smallest stocks, at least on paper, as Exhibit 4 shows. In practice, the transaction costs of this high-turnover strategy would eat a big chunk of these hypothetical returns, so a micro-cap momentum strategy isn’t advisable. But this return pattern provides further support for the idea that there is greater mispricing among the smallest stocks in the market than there is among large caps.
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