A landmark 100-year analysis of US equities has pulled into question the small cap premium, with implications for the many ASX ETFs built to capture it.
A new study by US finance professor Henrik Bessembinder has found that wealth creation in equity markets is far more concentrated than previously understood, undermining the long-held assumption that smaller companies inherently outperform their larger peers.
Bessembinder’s paper, One Hundred Years in the US Stock Markets, is the latest update to his research covering nearly 30,000 US common stocks listed between 1926 and 2025.
The research found that just 46 firms accounted for half of the US$91 trillion in total wealth created across US stock markets over the last century. Only 3.72 per cent of firms generated all net wealth creation, while the remaining 96.28 per cent collectively delivered returns no better than Treasury bills.
It is also accelerating: when Bessembinder ran the same analysis in 2018, 89 firms accounted for half of wealth creation through 2016.
The top five – accounting for 21 per cent of all wealth created in US stock markets in over a century – are all “Magnificent 7” names: Apple, Nvidia, Microsoft, Alphabet, and Amazon.
Speaking to Investor Daily, ETF Shares chief operating officer Will Taylor argued that this level of concentration has a direct bearing on the small-cap premium, the theory that smaller stocks outperform over time and on which many ASX-listed small cap ETFs are based.
“Bessembinder’s data suggests a reversal, or at least a significant challenge to that theory,” Taylor said.
As he explained, most small-cap ETFs harvest the premium through a combination of universe filters, weighting methodology, and period rebalancing.
A typical structure excludes the top 100 companies from an index like the ASX 300, concentrating exposure in the tail of the market where academic theory suggests higher growth and higher risk reside. Meanwhile, equal-weighted variants go further, assigning every holding the same allocation.
“This mechanically forces the fund to buy more of the smaller names and sell winners as they grow too large. It is, by definition, a buy low, sell high rebalancing mechanism.”
In line with Bessembinder’s findings that most small caps fail, Taylor said ETF providers have responded to this issue with quality screens that filter for real earnings, low debt, or positive cash flow to weed out value traps and exit-only listings.
However, he said the challenge now is that if mega cap companies are acquiring these small innovators before they reach public markets (or while they are still very small), ETFs may be left harvesting the leftovers rather than the next big winners.
“In that scenario, the mechanical design of the ETF remains sound but the pond it’s fishing in has changed.”
He pointed to the shift towards a growth via acquisition model over the last two decades.
Examples include Google’s acquisition of YouTube, Facebook’s purchase of Instagram, and Amazon’s expansion into European retail, as evidence that the pipeline of smaller companies growing into market-beating performers has been systematically interrupted.
“By acquiring their way out of competition, these giants have effectively cannibalised the small cap premium, absorbing the growth of smaller innovators before they ever have the chance to outperform on their own.”
A similar trend has been mirrored locally, with ASX IPO volumes falling last year as many companies opted to stay private for longer.
Though 2026 has seen much stronger listings activity so far, Taylor argued that for many businesses, the public market has essentially become a “dumping ground” – a place to list when private funding dries up or founders are looking for an exit, reasons that rarely set companies up to thrive.
He added that market concentration also reframes the active versus passive debate, since missing out on the top 1 per cent of companies can lead to drastic underperformance.
“For passive investors, this justifies holding the whole market to ensure those winners are captured. For active managers, it raises the stakes: the job isn’t just about avoiding losers, but about the high conviction identification of the next big winner.”
Taylor concluded that the concentration of market gains among a handful of dominant firms reflects a broader “rich get richer” dynamic, reinforcing a self-perpetuating cycle.
“This isn’t just a financial curiosity, it has profound implications for wealth distribution. Because so much global wealth is tied to these business interests, the concentration of stock market gains into fewer hands creates a feedback loop for societal inequality.”
