Simple, but Not Easy Where Did the Small Caps Go?
Oct 30, 2025
Zach Evans, a manager research analyst at Morningstar who specializes in ETFs and passive investment strategies, dives into the shifting landscape of small-cap investing. He explains how private markets are claiming opportunities once available in public stocks, leading to small-cap underperformance. Zach discusses the impact of regulatory changes on accessibility, the risk factors associated with small caps, and how volatility differs by market cap. Finally, he explores potential catalysts for reversing current sentiment toward small caps and the challenges active managers face in this changing environment.
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Small Caps' Long Underperformance
- Small-cap indexes have severely underperformed large caps over the past decade, widening a long-term performance gap.
- Zach Evans highlights a roughly 6.7% annualized underperformance for small caps versus large caps in recent years.
Don't Rush Into 401(k) Private Assets
- Expect regulatory changes to enable private assets in 401(k)s but plan for slow adoption.
- Wait for asset managers to build compelling, well-structured private-asset products before allocating retirement capital.
Top Growth Firms Skip Small-Cap Stage
- Private companies with the highest growth potential often stay private or IPO into large-cap territory.
- That migration removes many high-upside firms from the small-cap public opportunity set.