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A Tale of Two Indexes

Portfolio Manager

Investors have a couple of index options to gain exposure to the small-cap equity universe. Understanding index specifics, and importantly their differences, enables investors to make more informed decisions around which index would best meet their investing needs.

There has been a healthy debate within the investment community around which small-cap index universe is optimal to invest in: the S&P 600 or the Russell 2000. In this paper we will define these indexes, explore the similarities and differences, and provide pertinent information in order to help investors make an informed decision when deciding which index is more suitable for their portfolio.

Defining the Indexes: Construction and Methodology

S&P 600

The S&P SmallCap600 Index is the small-cap series of the S&P Dow Jones U.S. equity indexes, representing almost 3% of the U.S. equity market. The S&P 400 (mid-cap) Index combined with the S&P 600 constitute the S&P 1000, and the S&P 1000 plus the S&P 500 (large-cap) comprise the S&P 1500. While the S&P 600 is constructed of small-sized companies that are typically less liquid and stable than large-cap names, these small-cap names must meet specific criteria based on investability and financial viability in order to be included. The S&P SmallCap 600 Index implements changes on an as-needed basis. Constituent deletions may occur due to bankruptcy, mergers, acquisitions, significant restructuring, or substantial violation of one or more of the eligibility measures. Constituents removed from the index are replaced by an addition at the time of the deletion. To be eligible for inclusion in the index, a company should be a U.S. company, have a market capitalization between $750 million to $3.3 billion, maintain a public float of at least 10% of its shares outstanding, and have its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings be positive.

The S&P 600 is maintained by the U.S. Index Committee. The Index Committee meets monthly and reviews pending corporate actions that may affect index constituents, statistics comparing the composition of the indexes to the market, companies that are being considered as candidates for addition to an index, and any significant market events. Companies are not removed from or added to the S&P 600 because of anticipated future stock price performance. Rather, the informed approach of the Index Committee keeps turnover low and allows quick adjustments when a company’s financial status or overall market conditions change. The index also rebalances quarterly in March, June, September, and December.

Russell 2000

The Russell 2000 Index is the small-cap segment of the Russell US equity universe. This index is a subset of the Russell 3000 Index, representing approximately 7% of the total market capitalization of that index. Unlike the S&P 600, there is no financial viability criteria and no Index Committee to make decisions about inclusion. This index is made up of approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. It is constructed to provide a comprehensive and unbiased small-cap component, and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. Once the market capitalization for each security is determined by use of total shares and price, each security is placed in the appropriate Russell market capitalization–based index. The Russell 2000 Index includes companies #1,001–3,000, based on descending total market. There has to be a minimum company total market cap of $30 million on rank day, which occurs annually in May. Then the index has its annual reconstitution in June. This index also has smaller quarterly rebalances, which occur annually in March, September, and December.

Refer to Figure 1 for a detailed comparison between the two indexes.

Figure 1 Comparison across Indexes

Comparison across Indexes

Figure 2 Summary of Characteristics Across the Indexes

Summary of Characteristics Across the Indexes

Figure 3 Top 5 Holdings Comparison

Top 5 Holdings Comparison

Figure 4 Sector Breakdown of the Indexes

Sector Breakdown of the Indexes
Sector Breakdown of the Indexes

Figure 5 Comparative Performance Across the Indexes

Comparative Performance Across the Indexes
Comparative Performance Across the Indexes
Comparative Performance Across the Indexes
Comparative Performance Across the Indexes

Analyzing the index performance over the past ten years does not give any guarantees as to how either index will perform in the future; however, it is a helpful to compare historical returns to see if there are any trends. One may want to consider that the S&P 600 has a financial viability requirement for companies, whereas the Russell 2000 does not. This can potentially result in a higher percentage of unprofitable companies being included in the Russell Index, for example. On the other hand, there could be a greater potential for growth, given the smaller size of the average Russell 2000 company. The Russell 2000 also tends to be larger and more diverse than other popular small-cap indexes, something that arguably makes it more representative of the “real” economy.

Cost of Trading

When choosing a benchmark, another critical factor to consider is the cost of trading. Below are comparisons of cost when buying a slice of each index in three different amounts ($100 million, $250 million and $1 billion). In all three cases it is more costly to buy an S&P 600 slice. The drivers of these costs are the impact costs, which are a reflection of the percentage of the average daily volume (ADV). The cost differential between the two indexes becomes greater as the dollar value increases.

Figure 6 A Comparative Look at Trading Costs

A Comparative Look at Trading Costs

In addition to these estimated costs for trading flows, investors should also consider turnover. Average two-way turnover for the S&P 600 Index over the past 10 years is 41.33%, whereas the Russell 2000 Index’s average two-way turnover is only 27.07% over this same time period. The additional trading in S&P 600 means more transaction costs.


There are many differences among indexes that investors should consider when choosing an index for investing. The optimal approach, in our view, is to not only weigh the pros and cons, but also factor in any existing holdings to ensure the entire asset allocation is being considered. For example, if an investor has exposure to the S&P 500, he/she may want to consider the S&P 600 for small-cap exposure, in addition to the S&P 400, which covers the mid-cap market. Further, if an investor has exposure to the Russell 1000, then the Russell 2000 may be a better fit to round out the investor’s holdings. Staying within the same benchmark family can help ensure no overlaps or gaps. For example, adding the S&P 600 to the Russell 1000 could, in theory, provide a small-cap component, yet this is typically not considered a preferred option, given the overlap. Rebalancing also becomes more difficult without clear-cut market cap bands. Similarly, holding the S&P 500 and adding the Russell 2000 would leave a hole in the mid-cap exposure.

Investors should also determine the best way to access these indexes. This can be done by investing in pooled funds (i.e. mutual funds, commingled funds, or ETFs) or by setting up a separately managed account (SMA). SMAs allow investors to customize indexes as needed, but these vehicles are more expensive, more complex, and are often time-consuming to set up. All strategies and investment vehicles are feasible, though, and each investor should examine the full picture before deciding what is the best approach given their investment objectives.

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