Looking at average annualized returns going back decades, small cap stocks have beaten large caps, value has outperformed growth, and high profitability stocks have outgained low profitability stocks. How should investors think about these premiums over shorter time periods?

  • We can evaluate the reliability of the premiums by examining performance during rolling, overlapping periods formed each month (e.g., January to December, February to January, etc.).
  • The premiums were positive over most one and five‑year periods, and they increased over longer stretches. Value, for instance, beat growth in 79% of 1,039 measurable 10-year periods.

When investors target the size, value, and profitability premiums, a long-term focus increases the odds of achieving positive outcomes.

In USD. Chart based on monthly rolling returns, computed as follows: Dimensional US Small Cap Index minus S&P 500 Index, June 1927–December 2022; Fama/French US Value Research Index minus Fama/French US Growth Research
Index, July 1926–December 2022; and Fama/French US High Profitability Index minus Fama/French US Low Profitability Index, July 1963–December 2022.
Small vs. Large: 1,136 periods of one year; 1,088 periods of five years; 1,028 periods of 10 years. Value vs. Growth: 1,147 periods of one year; 1,099 periods of five years; 1,039 periods of 10 years; High Profitability vs. Low Profitability:
703 periods of one year; 655 periods of five years; 595 periods of 10 years.
Size premium: The return difference between small market capitalization stocks and large market capitalization stocks. Value premium: The return difference between stocks with low relative prices (value) and stocks with high relative
prices (growth). Profitability premium: The return difference between stocks of companies with high profitability over those with low profitability.
S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Dimensional US Small Cap Index: Created by Dimensional in March 2007 and compiled by Dimensional. It represents a market-capitalization-weighted index of securities of the smallest US companies whose market capitalization
falls in the lowest 8% of the total market capitalization of the eligible market. The eligible market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions:
non-US companies, REITs, UITs, and investment companies. From January 1975 to the present, the index excludes companies with the lowest profitability and highest relative price within the small cap universe. The index also excludes those
companies with the highest asset growth within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Asset growth is defined as change in
total assets from the prior fiscal year to current fiscal year. Source: CRSP and Compustat. The index monthly returns are computed as the simple average of the monthly returns of 12 subindices, each one reconstituted once a year at the
end of a different month of the year. The calculation methodology for the Dimensional US Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.
Fama/French US Value Research Index: July 1926–present: Provided by Fama/French from CRSP securities data. Includes the lower 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq
equivalents since 1973).
Fama/French US Growth Research Index: July 1926–present: Provided by Fama/French from CRSP securities data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq
equivalents since 1973).
Fama/French US High Profitability Index: July 1963–present: Courtesy of Fama/French from CRSP and Compustat securities data. Includes all stocks in the upper 30% operating profitability range of NYSE eligible firms; rebalanced
annually in June. OP for June of year t is annual revenues minus cost of goods sold, interest expense, and selling, general, and administrative expenses divided by book equity for the last fiscal year end in t-1. Fama/French and
multifactor data provided by Fama/French.
Fama/French US Low Profitability Index: July 1963–present: Courtesy of Fama/French from CRSP and Compustat securities data. Includes all stocks in the lower 30% operating profitability range of NYSE eligible firms; rebalanced annually
in June. OP for June of year t is annual revenues minus cost of goods sold, interest expense, and selling, general, and administrative expenses divided by book equity for the last fiscal year end in t-1. Fama/French and multifactor data
provided by Fama/French.
The Dimensional and Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual
portfolios and do not reflect costs and fees associated with an actual investment.
Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical
and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.
Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book.
Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.