The S&P SmallCap 600 stock index outperformed the Russell 2000 stock index by almost two percentage points per year over the last 15 years, a divergence resulting from inherent differences in index construction and the annual reconstitution of the Russell index, according to a study released by Standard & Poor’s.
The S&P SmallCap 600 returned 8.17% annually from 1994 through 2008, while the Russell 2000 returned 6.2% in the same period, the study said. The S&P SmallCap 600 also outperformed the Russell 2000 in 11 of the 15 years.
Both indexes measure the performance of the small-cap segment of the U.S. equity market, according to statements by the firms.
Russell spokesman Steve Claiborne said that “the Russell 2000, Russell 2000 Growth, Russell 2000 Value and Russell 2500 (indexes) all far out-distance any other small-cap benchmark and rank as the leading small-cap benchmarks by a country mile.
“In terms of U.S. small-cap equity benchmarks, Russell's small-cap indexes account for 99% of institutional assets that use a small-cap benchmark,” he added.
About half the excess return of the S&P SmallCap 600 was attributed to the impact in July of the annual Russell index reconstitution in June.
“We expect this effect to moderate over time due to enhancements made to Russell’s rebalancing process,” such as adding recent initial public offerings to its index on a quarterly basis, the study said.
The remaining excess return was caused by several factors, including the different composition of stocks within industrial sectors and the higher exposure to value risk by the S&P SmallCap 600. Also, the S&P SmallCap 600 requires that additions to the index have positive earnings, “profitability screens (that) have added to performance” over the Russell 2000, the study said.
The S&P index’s 600 components are selected by a committee, following certain eligibility requirements and making changes as needed, according to the study. The Russell 2000 represents companies based on their market capitalization. It had 2,027 companies as of May 31. The index is reconstituted annually.
The S&P SmallCap 600 had a market cap of $324 billion as of June 19, said David R. Guarino, S&P manager of global index communications, said. The Russell 2000, about $750 billion, Mr. Claiborne said.
The study was written by Aye M. Soe, S&P director of index research and analysis, and Srikant Dash, S&P vice president and head of the global research and design group.
