What is the size premium?
The size premium refers to the historical difference in returns between small and large companies – often operationalized using the SMB (small minus big) factor. This correlation became particularly well known through the work of Eugene F. Fama and Kenneth R. French, who showed that company size (among other characteristics) can be systematically linked to average stock returns. The following applies: The size premium is less of a tactical bet than a potential structural effect that materializes over long horizons and can be significantly disappointing in the meantime.
Why can smaller companies perform better?
Research discusses several complementary explanations—beyond the simple explanation that "small" equals "riskier":
Information coverage and market efficiency: Small caps often receive less attention from analysts and large investors. Where there is less attention, mispricing can persist for longer—and is corrected only after a delay.
Capacity, liquidity, and investor restrictions: Many institutional investors are limited by mandates, liquidity requirements, or practical feasibility. This can create differences in demand—and thus systematic valuation differences.
Growth, innovation—but also greater uncertainty: Smaller companies are often closer to niches, innovations, or early growth phases. This can support long-term earnings momentum, but it is often accompanied by greater earnings volatility, financing, and liquidity risks. It is precisely these frictions that are a plausible component of what investors want to see compensated for.
The size premium in the Swiss stock market
The size aspect is particularly visible in the Swiss market because the blue-chip world is highly concentrated: the SMI comprises the 20 largest and most liquid stocks from the SPI and covers a large part of the market capitalization. The SPI Extra, on the other hand, tracks the SPI stocks outside the SMI and thus serves as a benchmark for Swiss small and mid caps.
An allocation to small and mid caps is a strategic addition with its own risk and return dynamics: in addition to growth opportunities, this also includes longer periods of relative weakness, higher illiquidity, and, in some cases, larger drawdowns. Anyone who wants to take advantage of the size premium therefore needs diversification, discipline, and staying power.
Is the size premium an independent factor?
Even after decades of research, the academic debate remains open. One prominent criticism is that "size" is often not a clearly isolatable driver of returns, but rather bundles or amplifies other effects. Studies show that the pure size premium can be weak at times—for example, in the US stock market in recent years. At the same time, recent studies suggest that size can appear significantly more robust under certain conditions (e.g., when controlling for junk/quality characteristics). In practical terms, this often means that combinations such as small value or small quality are considered more stable than "small" alone. Another promising approach is to focus on the lowest-risk stocks in the universe of small-cap stocks in order to reap the low-risk premium in combination with the low-size premium.
Significance for investors
For investors, this means that the size premium should not be misunderstood as a constant excess return. Instead, it is a structural return component that depends on market phases, liquidity, and the composition of small companies. In the Swiss context, the SPI Extra can systematically reflect access to this segment – but the construction of a broadly diversified portfolio and consistent risk management remain crucial.
Conclusion
The size premium describes the observation that smaller companies can deliver higher value for investors in the long term – albeit without any guarantees and with occasional dry spells. The Swiss index landscape makes the size aspect transparent: SMI as a blue-chip reference, SPI as a broad universe, and SPI Extra as a benchmark for small and mid caps. Whether "size" is an independent factor or a catalyst for other return drivers remains a subject of research – but one thing is clear: company size influences market mechanisms, liquidity, and attention. This is precisely what can create long-term investment value.
