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The Canadian small-cap space is in the midst of its greatest run in more than a decade, electrifying a corner of the market that was, until recently, largely abandoned.

Since global stock markets started rebounding roughly a year ago, small-cap returns have outpaced their large-cap TSX counterparts by a factor of nearly two to one, as the S&P/TSX SmallCap Index has risen by 125 per cent.

There are several catalysts driving the small-cap revival: heightened risk appetite, spectacular levels of stimulus flooding the market with liquidity, and a younger demographic of investors flocking to equities.

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The past two weeks, however, have put a dent in the small-cap story, as the renewed spread of COVID-19 infections globally took the momentum out of reopening plans and set off a bout of financial market volatility. The small-cap index has dipped by 6 per cent over that time.

But some small-cap specialists say it’s far too soon for the comeback to end. “I think our universe is expanding again,” said Vishal Patel, who manages the Dynamic Power Small Cap Fund. “It’s the right time in the cycle for small cap.”

It hasn’t been the right time for Canadian small caps in many years. Starting around 2011, public venture capital indexes peaked as the multiyear bull market in commodities started to weaken.

Many investors lost interest in junior resource plays, kicking off an exodus that would see the entire Canadian small-cap ecosystem shrink to the point of irrelevance. From its early 2011 peak, the S&P/TSX Venture Composite Index fell by more than 80 per cent over the following five years as metals and energy prices plunged.

The first signs of life on the TSX Venture came from the gold rush in marijuana stocks surrounding federal legalization of cannabis in 2018. Then came another round of initial public offerings and investor hysteria over blockchain and cryptocurrency names. In both cases, when the bubble popped, many inexperienced investors were hit with big losses.

“Small cap is prone to stock promotion,” Mr. Patel said. “There is a lot of hype around IPO activity, so I would advise caution.”

A new cohort of investors seems to be drawn to the small-cap space. They have signed up for discount brokerage accounts in record numbers in recent months, and they have little time for the large-cap mainstays of the TSX, said Darrin Hopkins, director of the private client capital markets division of Richardson Wealth.

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“We’ve got the millennial investor, and even younger, suddenly engaged in the market, and they don’t want to hear the same old stories,” Mr. Hopkins said. The sectors and themes resonating with a younger crowd include technology and internet startups, renewable energy, electric vehicles and ESG, he said.

Rookie traders’ preference for, and influence over, the small-cap space stands out in recent research by Bank of America. A study from last June showed the average user of the Robinhood trading platform – especially popular among novice investors – allocated 11 per cent more capital to small caps and 17 per cent less to large caps than the average Bank of America client. And on peak trading days, the study found retail investors generated about 30 per cent of the trading in some small-cap stocks.

A more-recent report from the Swiss Finance Institute found demand by Robinhood traders added 20 per cent to the market capitalization of the smallest quintile of U.S. stocks last July.

By many accounts, Canadian investors are flush with cash and eager to hand some of it over to earlier-stage companies. “There is lots of capital looking for new homes right now,” Mr. Hopkins said. “These companies can easily raise $10-million or $20-million.” A spate of IPOs reminiscent of the dot-com boom has seen a number of tech and telehealth companies go public in recent weeks, with many more in the works.

Investors ought to be very picky, Mr. Patel said. “Out of 100 deals, there is going to be a handful of amazing businesses that will become the next TSX 60 businesses.”

Mr. Patel said his best bet to make that leap is Trisura Group Ltd., a small property and casualty insurance business that was spun out of Brookfield Asset Management in 2017. “Nobody knew what it was,” Mr. Patel said. “There’s a lot of growth opportunity in the U.S., whether it’s through consolidation, or organic growth.”

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Other top holdings in the Dynamic fund include Richelieu Hardware Ltd., Interfor Corp. and Canfor Corp., all of which are beneficiaries of the boom in demand for construction materials and lumber products.

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