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Reversal of Fortune
Over the long haul, small growth low profitability stocks have woefully underperformed. From 1990 to 2024, a global index of these stocks1 returned an annualized 1.19%, a fraction of the 9.14% that global small caps exclusive of low profitability2 have achieved. However, these laggards went on a relative tear in the first 10 months of 2025. Cumulative returns for these two groups through October were 22.23% versus 12.33%, respectively.
Then November arrived. Global small caps beat their low profitability counterparts in one month by nearly 400 basis points, 2.1% versus −1.87%. Turns out, a quick turnaround following low profitability stock rallies is not unprecedented.
Turning to the US market, where we have a sample period stretching all the way back to 1975, we identified the top quartile of rolling three-month relative returns for US small growth low profitability stocks. During these periods, low profitability stocks outperformed other small cap stocks by an average of 7.83%. But their advantage tended to be temporary, as low profitability lagged on average over the subsequent three-, six-, and 12-month periods.
Given the historical underperformance of small growth low profitability stocks, there’s opportunity to add value within small caps by excluding these stocks. And if history is anything to go by, that story doesn’t change with a few months of role reversal in performance.
Exhibit 1
US Small Growth Low Profitability Minus US Small Cap
Average relative returns, January 1975–September 2025
Past performance is not a guarantee of future results. Actual investment returns may be lower.
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Footnotes
- 1. Dimensional Global Small Cap Growth Low Profitability Index
- 2. Dimensional Global Small Index
Glossary
Annualized return: The compound performance of an investment expressed on a per year basis.
Growth: Stocks with a high market price relative to their book price.
Profitability: A company’s operating income before depreciation and amortization minus interest expense scaled by book equity.
Relative return: A measure of the return of one investment relative to another.
Rolling return: A measure of the performance of an investment over a defined time period with the start date rolling forward.
Small cap: Stocks with a relatively small market capitalization.
Growth: Stocks with a high market price relative to their book price.
Profitability: A company’s operating income before depreciation and amortization minus interest expense scaled by book equity.
Relative return: A measure of the return of one investment relative to another.
Rolling return: A measure of the performance of an investment over a defined time period with the start date rolling forward.
Small cap: Stocks with a relatively small market capitalization.
Index descriptions
The Dimensional indices have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inception dates. Accordingly, results shown during the periods prior to each index’s inception date do not represent actual returns of the 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.
The Dimensional Global Small Growth Low Profitability Index was created by Dimensional in October 2018. The index consists of small cap securities in the eligible markets with the lowest profitability and highest relative price within their country’s small cap universe, after the exclusion of utilities and companies with either negative or missing relative price data. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Countries currently included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, United Kingdom, and United States. Exclusions: REITs and investment companies. Source: Bloomberg.
The Dimensional Global Small Index was created by Dimensional in April 2008. The index is a market capitalization-weighted index of small company securities in the eligible markets, excluding those with the lowest profitability and highest relative price within their country’s small cap universe. The index also excludes those companies with the highest asset growth within their country’s small cap universe. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. Countries currently included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, and United States. Exclusions: REITs and investment companies. Source: Bloomberg. The calculation methodology was amended in January 2014 to include profitability as a factor in selecting securities for inclusion. The calculation methodology was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion.
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