What type of low-cost stock index exchange-traded fund (ETF) would give the best long-term total return, based on historical stock market data? Would it be a narrow blue chip stock index or a broader stock market index or something entirely else?
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1By yield are you specifically referring to dividend yield, or are you just intending to ask about overall rate of return?– Chris W. ReaJun 27, 2016 at 0:06
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1Daniel Storm: I rephrased the question to look for an answer based on historical data, which is what was originally intended.– Make MarkJun 27, 2016 at 7:46
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Chris W. Rea: Thanks for asking about this. I changed "yield" to say "total return" to clarify that the intention is to maximize the combination of dividend and growth.– Make MarkJun 27, 2016 at 7:48
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1 Answer
Small cap and mid cap shares tend to outperform large cap shares in a bull market, but they tend to underperform large cap shares in a bear market.
Since the stock markets tend to go up in the long term, this suggests that a low cost small and mid cap index ETF should offer the best long term returns.
Having said that, we are currently in a mature bull market having experienced over seven years without encountering a bear market. If a bearish outlook is something you worry about, then perhaps a broad market index, which will be heavily weighted towards large cap shares, may be a better choice for you at this time, with an eye toward switching to small and mid cap indices during the next bear market.
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Would you happen to have any pointers to (preferably academic) sources to back up the claims about differences between small and large cap share performance in different markets? Jun 27, 2016 at 7:53