Northern Exposure: How Canadian Small Stock Investments Can Benefit Investors

Abstract

We investigate the extent to which investors from around the world can benefit from investing in small market capitalization Canadian stocks. Using monthly data from 1950 to 2009, we show that the size effect has not lessened over the decades in Canada, despite earlier evidence to the contrary in the U.S. We show that with their low correlation to large stocks in Canada and other developed markets, Canadian small stocks represent a unique asset class, and as such an international investor who included a portion of Canadian small stocks would have had a much better return-to-risk reward than from including only large stocks from ten developed equity markets. Based on daily trading volume, we examine and discuss important investabilty issues overlooked in most similar studies. Finally, we corroborate U.S. findings that highlight the importance of returns in January in explaining the bulk of the size effect and examine the size effect in a variety of economic conditions including crises.