Northern Exposure: How Canadian Micro-Cap Stock Investments Can Benefit Investors

Abstract

Micro-cap stocks, a subset of small stocks, have the potential to provide additional diversification benefits and increased returns to investors. The ways that micro-cap stocks can contribute to investors’ actual portfolios have not been rigorously investigated. In this study, we examine micro-cap stocks in Canada and consider investability constraints and transaction costs that are overlooked in most other size-effect studies. We find that micro-cap stocks in Canada have relatively high returns and a low correlation to large stocks in Canada, the United States, and other developed markets. We conclude that these findings demonstrate that Canadian micro-cap stocks appear to represent a unique asset class and that investing in this unique asset class can improve the risk-return characteristics for global investors’ overall portfolios. We therefore suggest that global investors consider adding Canadian micro-cap stocks to their portfolios.

Keywords: Canadian micro-cap stocks

JEL Classification: G10, G11