many differences in small cap indexes

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rm
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many differences in small cap indexes

Post by rm » Fri Jul 13, 2018 3:27 pm

I wanted to allocate a portion of my portfolio to small caps. It seems to me there are quite a bit of differences (and performance deltas) between small cap indices.

The russell 2000 index seems to trail the S&P 600 index by a healthy margin. And I don't think there is any recency bias her because some of the links do a 15 year study. Even the volatility of S&P 600 is less than russell.

https://www.ifa.com/articles/small-_alpha_myth_update/
http://etfdb.com/tool/etf-comparison/IJ ... erformance

Is there any structural reason why russell is worse off. The seeking alpha article below seems to think so.
https://seekingalpha.com/article/418710 ... l-cap-scam
I remember DFA mentioning that they do things (trading, taxing etc) to get some structural advantage, especially with small caps. While I am not planning to go to DFA right now it will help me gain optimal returns with present choices.

It will really help me decide where to put my investment. My 401k only offers fund that tracks russell 2000. I can fill up my 401k with other asset class and buy the S&P600 in the taxable account if needed.

thank you !!

MotoTrojan
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Re: many differences in small cap indexes

Post by MotoTrojan » Fri Jul 13, 2018 11:19 pm

Russell was prone to front-running (buying stocks before they enter the index) but I think they corrected that. Also S&P has a quality check via their earnings requirements.

If basing your decision on past results at least consider using a value fund; small-value historically have complimented each other nicely.

IJS/VIOV are quite tax-efficient but I prefer to hold in my Roth before taxable.

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danielc
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Re: many differences in small cap indexes

Post by danielc » Fri Jul 13, 2018 11:43 pm

rm wrote:
Fri Jul 13, 2018 3:27 pm
I wanted to allocate a portion of my portfolio to small caps. It seems to me there are quite a bit of differences (and performance deltas) between small cap indices.

The russell 2000 index seems to trail the S&P 600 index by a healthy margin. And I don't think there is any recency bias her because some of the links do a 15 year study. Even the volatility of S&P 600 is less than russell.

https://www.ifa.com/articles/small-_alpha_myth_update/
http://etfdb.com/tool/etf-comparison/IJ ... erformance

Is there any structural reason why russell is worse off.
Yes. Russell 2000 was created long before people started investing with indexes and it really was not designed for that purpose. The probblem with Russell 2000 is that it is mechanistic and predictable. You can figure out ahead of time which companies are going to enter and leave the index, and you know when the index will be updated. So you know that on that day there will be a demand to sell certain companies and buy others (due to the number of mutual funds that track the index). This creates an arbitrage opportunity. Arbiteurs can pre-buy companies that are going to be in demand, and get rid of the ones that will be sold. This means that the mutual funds always buy at a slightly inflated price and sell at a slightly reduced price.

In contrast, the S&P 600 is chosen by a committee, and they comittee has a lot of discretion on which companies to put in it. They also don't have a set schedule when they are supposed to change the index. This makes it difficult to do arbitage. Another factor is that an S&P 600 index will have less turnover because the S&P committee intentionally avoids changing the index in order to reduce turnover.

This has been known for a long time. I am not impressed with the articles at IFA and seekingalpha. Most financial news is basically financial porn and you are better off ignoring it.
rm wrote:
Fri Jul 13, 2018 3:27 pm
It will really help me decide where to put my investment. My 401k only offers fund that tracks russell 2000. I can fill up my 401k with other asset class and buy the S&P600 in the taxable account if needed.
For what it's worth, that's what I do. Our 401k has a regular total market allocation and in taxable I use an ETF that tracks the S&P 600.

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danielc
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Re: many differences in small cap indexes

Post by danielc » Fri Jul 13, 2018 11:49 pm

rm wrote:
Fri Jul 13, 2018 3:27 pm
The russell 2000 index seems to trail the S&P 600 index by a healthy margin. And I don't think there is any recency bias her because some of the links do a 15 year study. Even the volatility of S&P 600 is less than russell.

https://www.ifa.com/articles/small-_alpha_myth_update/
Let me add another point. This article has nothing to do with the basis of your post. This article is about whether active managers can find and take advantage of inefficiencies in small cap. Then you suddenly change topic and start talking about market indices, which is the opposite of active management.

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vineviz
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Re: many differences in small cap indexes

Post by vineviz » Sat Jul 14, 2018 7:58 am

rm wrote:
Fri Jul 13, 2018 3:27 pm



The russell 2000 index seems to trail the S&P 600 index by a healthy margin. And I don't think there is any recency bias her because some of the links do a 15 year study. Even the volatility of S&P 600 is less than russell.
Fund Information (Jun 2000 - Jun 2018)
Russell 2000 ETF CAGR= 8.48%
iShares Core S&P Small-Cap ETF CAGR= 10.57%
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

not4me
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Re: many differences in small cap indexes

Post by not4me » Sat Jul 14, 2018 9:02 am

I didn't read the article, but 1st thought was that the sp600 was more midcap (less small & micro) & more concentrated. How much difference that would account for I'm not sure, but I never thought of these as comparable myself

letsgobobby
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Re: many differences in small cap indexes

Post by letsgobobby » Sat Jul 14, 2018 9:07 am

danielc wrote:
Fri Jul 13, 2018 11:43 pm
rm wrote:
Fri Jul 13, 2018 3:27 pm
I wanted to allocate a portion of my portfolio to small caps. It seems to me there are quite a bit of differences (and performance deltas) between small cap indices.

The russell 2000 index seems to trail the S&P 600 index by a healthy margin. And I don't think there is any recency bias her because some of the links do a 15 year study. Even the volatility of S&P 600 is less than russell.

https://www.ifa.com/articles/small-_alpha_myth_update/
http://etfdb.com/tool/etf-comparison/IJ ... erformance

Is there any structural reason why russell is worse off.
Yes. Russell 2000 was created long before people started investing with indexes and it really was not designed for that purpose. The probblem with Russell 2000 is that it is mechanistic and predictable. You can figure out ahead of time which companies are going to enter and leave the index, and you know when the index will be updated. So you know that on that day there will be a demand to sell certain companies and buy others (due to the number of mutual funds that track the index). This creates an arbitrage opportunity. Arbiteurs can pre-buy companies that are going to be in demand, and get rid of the ones that will be sold. This means that the mutual funds always buy at a slightly inflated price and sell at a slightly reduced price.

In contrast, the S&P 600 is chosen by a committee, and they comittee has a lot of discretion on which companies to put in it. They also don't have a set schedule when they are supposed to change the index. This makes it difficult to do arbitage. Another factor is that an S&P 600 index will have less turnover because the S&P committee intentionally avoids changing the index in order to reduce turnover.

This has been known for a long time. I am not impressed with the articles at IFA and seekingalpha. Most financial news is basically financial porn and you are better off ignoring it.
rm wrote:
Fri Jul 13, 2018 3:27 pm
It will really help me decide where to put my investment. My 401k only offers fund that tracks russell 2000. I can fill up my 401k with other asset class and buy the S&P600 in the taxable account if needed.
For what it's worth, that's what I do. Our 401k has a regular total market allocation and in taxable I use an ETF that tracks the S&P 600.
Sounds like the s&p600 is an actively managed fund.

MotoTrojan
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Re: many differences in small cap indexes

Post by MotoTrojan » Sat Jul 14, 2018 10:01 am

letsgobobby wrote:
Sat Jul 14, 2018 9:07 am
danielc wrote:
Fri Jul 13, 2018 11:43 pm
rm wrote:
Fri Jul 13, 2018 3:27 pm
I wanted to allocate a portion of my portfolio to small caps. It seems to me there are quite a bit of differences (and performance deltas) between small cap indices.

The russell 2000 index seems to trail the S&P 600 index by a healthy margin. And I don't think there is any recency bias her because some of the links do a 15 year study. Even the volatility of S&P 600 is less than russell.

https://www.ifa.com/articles/small-_alpha_myth_update/
http://etfdb.com/tool/etf-comparison/IJ ... erformance

Is there any structural reason why russell is worse off.
Yes. Russell 2000 was created long before people started investing with indexes and it really was not designed for that purpose. The probblem with Russell 2000 is that it is mechanistic and predictable. You can figure out ahead of time which companies are going to enter and leave the index, and you know when the index will be updated. So you know that on that day there will be a demand to sell certain companies and buy others (due to the number of mutual funds that track the index). This creates an arbitrage opportunity. Arbiteurs can pre-buy companies that are going to be in demand, and get rid of the ones that will be sold. This means that the mutual funds always buy at a slightly inflated price and sell at a slightly reduced price.

In contrast, the S&P 600 is chosen by a committee, and they comittee has a lot of discretion on which companies to put in it. They also don't have a set schedule when they are supposed to change the index. This makes it difficult to do arbitage. Another factor is that an S&P 600 index will have less turnover because the S&P committee intentionally avoids changing the index in order to reduce turnover.

This has been known for a long time. I am not impressed with the articles at IFA and seekingalpha. Most financial news is basically financial porn and you are better off ignoring it.
rm wrote:
Fri Jul 13, 2018 3:27 pm
It will really help me decide where to put my investment. My 401k only offers fund that tracks russell 2000. I can fill up my 401k with other asset class and buy the S&P600 in the taxable account if needed.
For what it's worth, that's what I do. Our 401k has a regular total market allocation and in taxable I use an ETF that tracks the S&P 600.
Sounds like the s&p600 is an actively managed fund.
No more so than S&P500.

MotoTrojan
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Re: many differences in small cap indexes

Post by MotoTrojan » Sat Jul 14, 2018 10:02 am

not4me wrote:
Sat Jul 14, 2018 9:02 am
I didn't read the article, but 1st thought was that the sp600 was more midcap (less small & micro) & more concentrated. How much difference that would account for I'm not sure, but I never thought of these as comparable myself
Believe you’re confusing it with the CRSP index that Vanguard now uses. Median market cap is roughly double that of the S&P600 and R2K.

not4me
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Re: many differences in small cap indexes

Post by not4me » Sat Jul 14, 2018 10:24 am

MotoTrojan wrote:
Sat Jul 14, 2018 10:02 am
not4me wrote:
Sat Jul 14, 2018 9:02 am
I didn't read the article, but 1st thought was that the sp600 was more midcap (less small & micro) & more concentrated. How much difference that would account for I'm not sure, but I never thought of these as comparable myself
Believe you’re confusing it with the CRSP index that Vanguard now uses. Median market cap is roughly double that of the S&P600 and R2K.
I'm not following. But let me try to be clearer myself. I thought the sp600 was more midcap (that is, had higher market caps) than Russell 2000; also thought that the one with 600 was more concentrated than the one with 2000! Has nothing to do with crsp. I don't know their market caps -- sounds like you have a source though. I may well be wrong, so feel free to share what the market caps are for the 2 originally under discussion. The concentration issue may not be pertinent, but would be interested in why it isn't if it isn't. There may well be other criteria they use (liquidity, etc) that eliminates based on things other than market cap, but I'd almost suspect the sp600 to be largely a subset of russell 2000?

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JoMoney
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Re: many differences in small cap indexes

Post by JoMoney » Sat Jul 14, 2018 10:35 am

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

MotoTrojan
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Re: many differences in small cap indexes

Post by MotoTrojan » Sat Jul 14, 2018 11:10 am

not4me wrote:
Sat Jul 14, 2018 10:24 am
MotoTrojan wrote:
Sat Jul 14, 2018 10:02 am
not4me wrote:
Sat Jul 14, 2018 9:02 am
I didn't read the article, but 1st thought was that the sp600 was more midcap (less small & micro) & more concentrated. How much difference that would account for I'm not sure, but I never thought of these as comparable myself
Believe you’re confusing it with the CRSP index that Vanguard now uses. Median market cap is roughly double that of the S&P600 and R2K.
I'm not following. But let me try to be clearer myself. I thought the sp600 was more midcap (that is, had higher market caps) than Russell 2000; also thought that the one with 600 was more concentrated than the one with 2000! Has nothing to do with crsp. I don't know their market caps -- sounds like you have a source though. I may well be wrong, so feel free to share what the market caps are for the 2 originally under discussion. The concentration issue may not be pertinent, but would be interested in why it isn't if it isn't. There may well be other criteria they use (liquidity, etc) that eliminates based on things other than market cap, but I'd almost suspect the sp600 to be largely a subset of russell 2000?
I see. You may be correct that the R2K delves deeper into the micro-realm (I am honestly not sure) but I was countering the fact that you stated the S&P600 was "more midcap" than R2K. Yes the S&P has less companies (VIOO holds 602 compared to VTWO's 2005) but S&P is still a small-cap fund and actually has a lower median cap at $1.8B vs. $2.1B, using the same funds as proxies respectively.

I was surprised to see that it appears there is no cross-over at all in the top-10 holdings of each.

Vanguard's ETF VB which covers CRSP has a median-cap of $4.4B; That in my view makes it "more midcap".

animule
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Re: many differences in small cap indexes

Post by animule » Sat Jul 14, 2018 11:19 am

Regarding the S&P 600 index, I don't think anyone has mentioned this, but the index was able to avoid a lot of the dot-com carnage around 1999 because it has a requirement that companies in the index have at least three consecutive years of earnings or at least three years of earnings. I believe this is the requirement.

Believe it or not, that prevented the index from piling into a lot of wing-and-a-prayer dot com companies that had huge valuations, but no income. When these companies crashed in the dot-com bust, a ton of money was lost, but not by the S&P 600 index because these companies were never part of it. Many were part of the Russell 2000.

This downside protection is one reason I strongly favor the S&P 600 index over any other small cap index.

letsgobobby
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Re: many differences in small cap indexes

Post by letsgobobby » Sat Jul 14, 2018 11:39 am

animule wrote:
Sat Jul 14, 2018 11:19 am
Regarding the S&P 600 index, I don't think anyone has mentioned this, but the index was able to avoid a lot of the dot-com carnage around 1999 because it has a requirement that companies in the index have at least three consecutive years of earnings or at least three years of earnings. I believe this is the requirement.

Believe it or not, that prevented the index from piling into a lot of wing-and-a-prayer dot com companies that had huge valuations, but no income. When these companies crashed in the dot-com bust, a ton of money was lost, but not by the S&P 600 index because these companies were never part of it. Many were part of the Russell 2000.

This downside protection is one reason I strongly favor the S&P 600 index over any other small cap index.
Since it’s actively managed, how does it compare to a pure index of comparable size companies, if there is such a thing?

anil686
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Re: many differences in small cap indexes

Post by anil686 » Sat Jul 14, 2018 11:47 am

I too like the SP 600 index for small caps. They are a de facto quality screen due to earnings and balance sheets. I encourage those looking at small caps to read a white paper from AQR where Asness looked at small caps. His conclusion is there is a lot of junk in small caps - one of the major reasons I like the SP screens for that segment. JMO though...

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JoMoney
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Re: many differences in small cap indexes

Post by JoMoney » Sat Jul 14, 2018 11:49 am

letsgobobby wrote:
Sat Jul 14, 2018 11:39 am
animule wrote:
Sat Jul 14, 2018 11:19 am
Regarding the S&P 600 index, I don't think anyone has mentioned this, but the index was able to avoid a lot of the dot-com carnage around 1999 because it has a requirement that companies in the index have at least three consecutive years of earnings or at least three years of earnings. I believe this is the requirement.

Believe it or not, that prevented the index from piling into a lot of wing-and-a-prayer dot com companies that had huge valuations, but no income. When these companies crashed in the dot-com bust, a ton of money was lost, but not by the S&P 600 index because these companies were never part of it. Many were part of the Russell 2000.

This downside protection is one reason I strongly favor the S&P 600 index over any other small cap index.
Since it’s actively managed, how does it compare to a pure index of comparable size companies, if there is such a thing?
The link I posted above
https://www.indexologyblog.com/2018/07/ ... cap-index/
discusses and has a graphic comparing the Russell 2000 and S&P 600 including the 1999-2000 period.

It's not necessarily "actively managed", but it does have a methodology that is more stringent then other indices. Every index has a methodology, does some trading, and on occasion may run into situations where humans make a decision (particularly when trying to decide if some multi-national company traded on a U.S. exchange is considered U.S. or foreign)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

drk
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Re: many differences in small cap indexes

Post by drk » Sat Jul 14, 2018 12:21 pm

letsgobobby wrote:
Sat Jul 14, 2018 11:39 am
Since it’s actively managed, how does it compare to a pure index of comparable size companies, if there is such a thing?
All indexes apply rules. That's not the same as active management. An algorithm is still an algorithm whether it's applied by a human or by a computer.

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danielc
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Re: many differences in small cap indexes

Post by danielc » Sat Jul 14, 2018 2:00 pm

letsgobobby wrote:
Sat Jul 14, 2018 9:07 am
Sounds like the s&p600 is an actively managed fund.
Some might say that; and some might say that that's wrong. It seems odd to call it a managed fund where the whole management is about facilitating PASSIVE investment. For example, it is market-cap weighted, and the whole idea minimizing turnover in order to facilitate passive investment does not line up with most people's view s of what active management is.

It is worth nothing that ALL the S&P indices are like that. -- The S&P 500, S&P 400 (Mid Cap), and S&P 600, and the other composite indices that they make.

Do you normally think of an index fund that tracks the S&P 500 as "active management"?

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danielc
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Re: many differences in small cap indexes

Post by danielc » Sat Jul 14, 2018 2:13 pm

not4me wrote:
Sat Jul 14, 2018 10:24 am
I'm not following. But let me try to be clearer myself. I thought the sp600 was more midcap (that is, had higher market caps) than Russell 2000;
According to the Morningstar style box (IWM vs IJR) the S&P 600 seems to be clearly the smaller one.
not4me wrote:
Sat Jul 14, 2018 10:24 am
also thought that the one with 600 was more concentrated than the one with 2000!
And the S&P 500 is "more concentrated" than the Russell 1000. What's your point? 500 and 600 stocks provide plenty of diversification and having 2000 stocks for a small-cap index promotes turnover as companies enter and leave the index.
not4me wrote:
Sat Jul 14, 2018 10:24 am
The concentration issue may not be pertinent, but would be interested in why it isn't if it isn't.
You only need about 50-ish stocks to diversify individual company risk. So concerns about concentration need to focus on market sectors, geographical regions, market caps, or similar. For example, 100 stocks spread across market caps and sectors are more diversified than 200 banks. The S&P indices are all explicitly constructed to fairly represent all the sectors of the US econoomy in proportion to their respective market caps.
not4me wrote:
Sat Jul 14, 2018 10:24 am
There may well be other criteria they use (liquidity, etc) that eliminates based on things other than market cap, but I'd almost suspect the sp600 to be largely a subset of russell 2000?
Of course it is. And both are subsets of the Wilshire 5000.

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danielc
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Re: many differences in small cap indexes

Post by danielc » Sat Jul 14, 2018 2:16 pm

drk wrote:
Sat Jul 14, 2018 12:21 pm
All indexes apply rules. That's not the same as active management. An algorithm is still an algorithm whether it's applied by a human or by a computer.
Wait. S&P 600 is not algorithm in the way that Russell 2000 is. The S&P 600 has GUIDELINES based on math, like market cap and earnings, but it 100% comes down to a group of humans sitting on a committee to decide when and how to reconstitute the index.

drk
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Re: many differences in small cap indexes

Post by drk » Sat Jul 14, 2018 2:33 pm

danielc wrote:
Sat Jul 14, 2018 2:16 pm
Wait. S&P 600 is not algorithm in the way that Russell 2000 is. The S&P 600 has GUIDELINES based on math, like market cap and earnings, but it 100% comes down to a group of humans sitting on a committee to decide when and how to reconstitute the index.
You're right that it's a different algorithm than the one used to create the Russell 2000. Both are also different than the one used to create the CRSP Small-Cap Index.

* Edited to remove a non-sequitur about index committees.

not4me
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Re: many differences in small cap indexes

Post by not4me » Sat Jul 14, 2018 3:01 pm

danielc wrote:
Sat Jul 14, 2018 2:13 pm
not4me wrote:
Sat Jul 14, 2018 10:24 am
I'm not following. But let me try to be clearer myself. I thought the sp600 was more midcap (that is, had higher market caps) than Russell 2000;
According to the Morningstar style box (IWM vs IJR) the S&P 600 seems to be clearly the smaller one. Maybe clear to you, just eyeball I didn't see the difference. As I said earlier, I might be wrong. No one has come up with numbers yet (I've skimmed the other posts) but no problem conceding
not4me wrote:
Sat Jul 14, 2018 10:24 am
also thought that the one with 600 was more concentrated than the one with 2000!
And the S&P 500 is "more concentrated" than the Russell 1000. What's your point? 500 and 600 stocks provide plenty of diversification and having 2000 stocks for a small-cap index promotes turnover as companies enter and leave the index.
not4me wrote:
Sat Jul 14, 2018 10:24 am
The concentration issue may not be pertinent, but would be interested in why it isn't if it isn't.
You only need about 50-ish stocks to diversify individual company risk. So concerns about concentration need to focus on market sectors, geographical regions, market caps, or similar. For example, 100 stocks spread across market caps and sectors are more diversified than 200 banks. The S&P indices are all explicitly constructed to fairly represent all the sectors of the US econoomy in proportion to their respective market caps. I know there is debate as to how many stocks make for adequate diversification; I've no interest in debating. In previous point, you said 500 & 600 was "plenty" then went on to talk benefits of having 2000? sounds as if you countered your own point. Even if 50-ish is diversified, that doesn't mean these are...you say they are explicitly constructed to "fairly represent" & I'll take your word for how well that occurs. However, IF the 2000 contains many more microcaps I find it hard to believe they get the performance to come out the same or why they would
not4me wrote:
Sat Jul 14, 2018 10:24 am
There may well be other criteria they use (liquidity, etc) that eliminates based on things other than market cap, but I'd almost suspect the sp600 to be largely a subset of russell 2000?
Of course it is. And both are subsets of the Wilshire 5000. You missed the point. It was meant to speak to the original question as to whether there were structural difference in the 2. My point was that if Russell 2000 contained SP600 in total & then some, it would have differences. I realize you imply earlier that while there are added stocks, it won't affect the performance. I missed where you addressed the original question.

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danielc
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Re: many differences in small cap indexes

Post by danielc » Sat Jul 14, 2018 3:23 pm

not4me wrote:
Sat Jul 14, 2018 3:01 pm
danielc wrote:
Sat Jul 14, 2018 2:13 pm
According to the Morningstar style box (IWM vs IJR) the S&P 600 seems to be clearly the smaller one.
Maybe clear to you, just eyeball I didn't see the difference. As I said earlier, I might be wrong. No one has come up with numbers yet (I've skimmed the other posts) but no problem conceding
Does this help? IWM is an ETF that tracks the Russell 2000 and IJR tracks the S&P 600.

Image

not4me wrote:
Sat Jul 14, 2018 3:01 pm
I know there is debate as to how many stocks make for adequate diversification; I've no interest in debating. In previous point, you said 500 & 600 was "plenty" then went on to talk benefits of having 2000?
I'm pretty sure I never did that.
not4me wrote:
Sat Jul 14, 2018 3:01 pm
Even if 50-ish is diversified,
I never said that either. Please re-read. I said 50-ish is enough to diversify INDIVIDUAL COMPANY risk. That is just one very specific risk. The sentence immediately that statement proceeded to say that you still sector risk, cap risk, and a bunch of other risks and then I explained that the S&P indices are designed to fairly represent all the sectors of the US economy in order to explicitly diversify those risks and to more fairly represent the behaviour of the market.
not4me wrote:
Sat Jul 14, 2018 3:01 pm
However, IF the 2000 contains many more microcaps I find it hard to believe they get the performance to come out the same or why they would
I just told you. Russell 2000 is not smaller. I also showed you a link. You claim you don't see it. I just showed you the graph. In any case, you can empirically observe that the return of S&P 600 has been higher than Russell 2000 for as long as these indices have existed.


not4me wrote:
Sat Jul 14, 2018 10:24 am
My point was that if Russell 2000 contained SP600 in total & then some, it would have differences. I realize you imply earlier that while there are added stocks, it won't affect the performance.
I did not say that. Please stop changing what I said. The Russell 2000 has worse performance because of front running and turnover. The only sense in which I ever suggested that 2000 companies is no different than 600 is in their ability to diversify individual company risk. Then I proceeded to talk at greater depth about the features of the S&P 600 relative to the Russell 2000.

petulant
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Re: many differences in small cap indexes

Post by petulant » Sat Jul 14, 2018 3:51 pm

This is an issue I have also been researching and coming to similar conclusions about. My 457 plan recently introduced a BNY Mellon small cap investment trust tracking the Russell 2000 with a .02% expense ratio, so I investigated. I determined there was no basis to tilt inside the account, even though I favor tilting, due to the index’s weaker rules compared to the S&P600 and its lack of any risk-adjusted benefit over equities generally over time (according to sharpe ratio measures).

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Re: many differences in small cap indexes

Post by GrowthSeeker » Sat Jul 14, 2018 7:51 pm

danielc wrote:
Fri Jul 13, 2018 11:43 pm
The problem with Russell 2000 is that it is mechanistic and predictable. You can figure out ahead of time which companies are going to enter and leave the index, and you know when the index will be updated. So you know that on that day there will be a demand to sell certain companies and buy others (due to the number of mutual funds that track the index). This creates an arbitrage opportunity. Arbiteurs can pre-buy companies that are going to be in demand, and get rid of the ones that will be sold. This means that the mutual funds always buy at a slightly inflated price and sell at a slightly reduced price.
Hmm, is there an actively managed fund which does precisely this? Buys stocks predicted to be joining the Russell 2000 in the near future and selling stocks predicted to be leaving the Russell 2000 in the near future?
Just because you're paranoid doesn't mean they're NOT out to get you.

NoHeat
Posts: 159
Joined: Sun Sep 18, 2016 10:13 am

Re: many differences in small cap indexes

Post by NoHeat » Sat Jul 14, 2018 9:11 pm

GrowthSeeker wrote:
Sat Jul 14, 2018 7:51 pm

Hmm, is there an actively managed fund which does precisely this? Buys stocks predicted to be joining the Russell 2000 in the near future and selling stocks predicted to be leaving the Russell 2000 in the near future?
Plenty of hedge funds (long-short equity hedge variety) have done this. As an individual, I used to do that myself (long the names expected to join the RUT, short the names expected to be dropped). I had a note on my calendar every year to repeat the same screen, based on market cap and index membership, to identify the names that were going to change. The trouble is that the play was so obvious, and so easy, that too many managers could do it, and the market inefficiency withered away so that it could no longer be exploited meaningfully.

fennewaldaj
Posts: 181
Joined: Sun Oct 22, 2017 11:30 pm

Re: many differences in small cap indexes

Post by fennewaldaj » Sat Jul 14, 2018 10:27 pm

So I saw in that seeking article he said 90% of small cap index funds track the r2k does anybody know if that is true. I would be surprised if that is true at least on an asset weighted base as vanguards small cap index is pretty huge ~90 billion in assets and ishares s+P 600 tracker IJR is also quite large ~45 billion. ishares r2k fund IWN has ~48 billion. The state street etf and vanguard indexes tracking the r2k are pretty small. Fidelity has an r2k fund with ~ 6 billion in assets. I am sure there are a bunch of small index funds from other companies that are tracking the russell. But it hardley seems to be dominating assets in this space.
My wifes 401k is by principal. They are not know for being index specialist. However they have separate account index funds for small and mid cap which use the s+p 400 and 600. So its not like every non state street, blackrock, vangaurd company is automatically unthinkingly picking the R2k.

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