Joachim Klement, head of strategy at Panmure Liberum, said small-cap premiums were "probably dead" and the power that once drove it "was either gone or overwhelmed."

say ETF StreamKlement’s 2025 ETF ecosystem unpackaged event believes that the rise of index investment “creates a self-reinforcement cycle in which the largest stocks become larger, and the advanced erosion of small-cap stocks may be permanent.”

Small-class premiums involve historical trends in the performance of small-cap stocks over time. but ETF Stream The phenomenon has been discussed last year since the 1980s, especially in the past decade.

For Klement, the timing of disappearance is no coincidence: it is in line with the rise of benchmarks and index investment.

This change in the investment community creates an environment in which small hats have less elasticity than large stocks – Mike Green, who simplifies asset management, recently ETF Stream.

Essentially, benchmark investors are forced to hold the largest stocks with the largest stocks, or tracking errors that are too risky. "Trust me, no risk team likes this," Klement joked.

Given their lower elasticity, every marginal dollar entering the stock market will make the price of large blocks relatively high, thus making the large “self-reinforcement” cycle form a scale, which Green believes makes the market vulnerable to sharp market collapses.

As further evidence, Klement highlights a study that stocks with a high "index inclusion ratio" (in other words, members of many indexes, such as the huge seven-near-miniature companies were better than those with low inclusion rates, a phenomenon that "exploded" in the 2010s in the 2010s, as shown in the figure below.

Figure 1: Index inclusion effect, 2000-2021-Source: Behmaram (2023)

Index inclusion “creates more automatic purchases (without valuation) to make prices higher. It is a human demand,” Klement explains.

He added: "This study even establishes counterfactual modeling: If there is no traffic flow to index funds and ETFs in the past 25 years? The performance of high scores containing stocks disappeared," he added.

Despite the evaporation of small-scale premiums, Klement believes they still play a major role in a diversified portfolio.

First, they tend to go beyond recession because they “agile and faster adapt to changing conditions…this periodic behavior provides diversified benefits and for active allocators, there is a chance to adjust exposure over time.”