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SMALLER IS BIGGER: A BETTER CHOICE

Smaller is Bigger is one of the successful investment strategies discussed in The Roadside Scholar.* To make them more memorable to students, I nickname them.


This name is meant to grab attention. Obviously, smaller is NOT bigger. The shorter Steph Curry is not bigger than Shaq. Rhode Island is not bigger than California. Most who hear it do a quick double take and then say, “Is that a mistake?” and then “What does it mean?”


I explain that conventional belief is that a portfolio of big, blue chip companies makes the most money for investors. Not true. A portfolio of smaller companies has delivered more money to investors over extended time periods than the big boys.

INVESTING TIP: Investing in small and medium size public companies has historically put more cash in the investor’s pocket than investing in the S&P 500.


Question: How does an individual invest in this type of company to gain the advantage?


Answer: An excellent and simple way is to buy a market bundle tracking the mid-cap segment of the US stock market, specifically the S&P MidCap 400 Index (the “Index”).


Two well established ETF bundles execute this strategy. Both can be purchased through an account at any major brokerage firm.


· iShares Core S&P Mid-Cap ETF (ticker: IJH): $48.6 billion managed, recent price $185 per share.

· SPDR S&P MidCap 400 ETF Trust (ticker: MDY): $18.7 billion managed, recent price $338 per share.


BIGGER PROFITS: Over the last 15 years, both IJH and MDY beat the performance of the SPY, the biggest S&P 500 ETF.** (Annual total return presented.)

· IJH: +9.6%

· MDY: +9.4%

· SPY: +8.7%


Both bundles own the same companies in the identical configuration as the mid-cap Index. Both have strong sponsorship and execution. Why is there a difference in profits between the two?


Costs Matter: IJH charges investors less per year. IJH’s expense ratio of 0.07% per year is less than the 0.24% charged by MDY. The IJH investor gets the same investment for a lower cost than the MDY investor.


MORE CASH IN POCKET: Investors made more money historically using the Smaller is Bigger strategy. $10,000 dollars invested at the above annual profits becomes a larger amount after 15 years (before fees and taxes).

· IJH: $39,550

· MDY: $38,480

· SPY: $35,100


The Roadside Scholar recommends the Smaller is Bigger strategy and to own IJH over MDY if choosing between these two mid-cap market bundles.


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* Page 136.

* Source: Morningstar.

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