Whats the rationale for indexing small-cap stocks in a supposedly inefficient market?
Right, the standard wisdom is to index large-caps and use active funds for small-caps. We believe our approach to indexing small-caps gives us a leg up over active managers, for three reasons. 1. First, the expense ratio is low at 0.75%, and we expect the expense ratio to decline in the next fiscal year. [The average expense ratio of funds in Morningstar’s small company fund database is 1.60%.] ‘Micro-cap’ funds that invest in tiny companies are even more expensive than ‘small-cap’ funds. 2. Trading costs are a major factor in the micro-cap space where there are large bid/ask spreads, which can sometimes run 4% to 5% percent of the cost of the trade. This is prohibitively expensive unless you have the size and expertise to aggressively make this an advantage rather than a disadvantage. Our goal is to on average sell closer to the ask and buy closer to the bid, rather than just putting out a market order, which would in fact more than give up the return advantage of the [ultra-small] as
