Of course, a balanced portfolio should also include the shares of smaller companies. In the long term, small caps, in which US stocks also account for the largest weighting, have ultimately outperformed large corporations in terms of returns. An analysis by Pascal Kielkopf shows which US small cap index is the better one.

In his new study, the capital market analyst from HQ Trust compares the performance of the well-known US small-cap indices Russell 2000 and the S&P 600 since 2001. It is immediately apparent that the performance of the S&P 600 differs significantly from that of the Russell 2000. This is due to significant differences in the index construction and consequently also in its composition:

– “The S&P 600 places more emphasis on quality. Before a company is included in the index, it must have achieved positive earnings for 4 consecutive quarters. There is no such earnings screening in the Russell 2000.”

– “There is also a difference in the frequency of index adjustments. While the Russell 2000 is only reviewed once a year, the S&P 600 is reviewed quarterly.”

– “The Russell 2000 is more broadly diversified: as the name suggests, the index is made up of 2000 companies. The S&P only has 600 stocks.”

Pascal Kielkopf’s look at the long-term returns of the two indices and the characteristics of the four important factors of value, growth, quality and volatility compared to an investment in the broad market shows just how significant these differences are.

– “Since 2001, the S&P 600 has achieved an average return of 8.4%. The Russell 2000 lags far behind at 6.9%.”

– “These one and a half percentage points make a big difference in the long term. 100 dollars would have turned into around 642 for the S&P, but only 461 for the Russell.”

A look at the individual factors shows where these differences come from.

– “Basically, the factors move in the same direction: Small-cap indices have a stronger value bias and a correspondingly weaker growth bias. In terms of volatility and quality, they lag behind the broad market.”

– “However, the differences are also immediately apparent when screening earnings: The Russell is significantly behind the S&P in terms of quality, which means its volatility is also higher.”

– “As the Russell also contains many (still) unprofitable growth companies, its value orientation is significantly lower – the S&P, on the other hand, contains fewer growth stocks.”