The Hidden Risk Within Passive Small-Cap

November 01, 2019 | Robert Britenbach, CFA, CIPM, Research Analyst, U.S. Equities

The rise of passive investing has been a multi-year trend among investors and currently accounts for nearly half of all assets within U.S. mutual funds and ETFs. The popularity of passive investing is not surprising given that the majority of actively managed funds charge higher fees and struggle to consistently beat their target benchmarks. However, the small-cap segment of the market bears watching, particularly among those investors that are passively invested.

This week’s Chart of the Week shows the percentage of companies over time within the Russell 2000 index that have no earnings. As of September 30, 2019, the percentage of companies within the Russell 2000 index with no earnings stands at 38%. This is one of the highest readings observed in nearly 25 years and is at levels typically not seen outside of recessionary periods.

Consistently strong passive inflows, a low interest rate environment, and general investor preference towards longer duration assets perceived to have recession-resistant, long-term secular growth drivers have helped to support companies with little to no earnings. This trend may eventually reverse and could bode well for active strategies that are structurally underweight this segment of small-cap. Regardless, it is important to acknowledge the growing trend and potential risk within the small-cap space.

Print PDF > The Hidden Risk Within Passive Small-Cap

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Robert Britenbach, CFA, CIPM
Research Analyst, U.S. Equities

Get to Know Rob

Related Content


Coronavirus Roils the Equity Markets

U.S. equities recently experienced a sharp three-day sell-off as the market digested the potential for short-term disruptions to economic growth…


Coronavirus and the U.S. Economy: Assessing the Impact

Over the last month, the world has been gripped by fears of the coronavirus and its eventual toll on the…


Much Ado About Corona?

By now, you have all read the headlines and watched various news commentators detail the perils of the latest pneumonia…


Is Manufacturing on the Rebound?

The ISM PMI index is a survey of manufacturers and measures the overall strength of the manufacturing sector. A measure…


Another Way to Look at Spreads

Bond spreads¹ now appear tight based on the traditional method of calculating spreads² as positive momentum…


Will the Spread of Coronavirus Drive a Risk-Off Market?

Global markets have come under pressure as the number of coronavirus cases grows. Through January 27th, the S&P 500 is…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >