Small stocks, big value
The stock market has been on a tear lately. The S&P 500 now has a forward P/E ratio of 18.7 which is more expensive than its historical average.
As investors we want to buy assets when they are cheap. Luckily stocks can be grouped by size. The S&P 500 are large cap companies.
But when we look at small cap stocks, they are trading at only 12.9 times forward earnings. In fact, small-caps are at their cheapest level in over a year. 🙂
This doesn’t necessarily mean small cap stock prices will rise soon. But it does point to better returns compared to large cap stocks in the longer term.
Here’s a graph showing the various forward P/E ratios by segment. The red line is large caps, and the green line is small caps.
If you don’t yet have some exposure to small cap companies now seems like a pretty good time to start accumulating some.
The Vanguard Small-Cap ETF (VB) is a suitable index fund to buy if you want to track the performance of US small cap stocks. The 0.05% expense ratio is very compelling. If you are buying with Canadian currency then one option is the iShares S&P US small-cap index ETF, (XSMC.)
The stock market goes through cycles. Sometimes large caps are cheap, other times small caps are cheap. By being selective when making these time sensitive decisions investors may be able to increase their overall returns over time. 🙂
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Random Useless Fact:
In Canada about two thirds of homeless people are men.
Very interesting and insightful. Thanks for sharing Liquid. I am going to check out $VB and $XSMC.
Both ETFs have done well this month. 🙂 Happy holidays Moe. 🎄