Small Cap, Big Difference

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Indices are samplings of the market and may differ substantially among index providers based on differences in construction methodology. Nowhere is that more evident than in US small cap stocks. The spread in returns between the best and worst performer among three major indices—S&P SmallCap 600 Index, Russell 2000 Index, and CRSP US Small Cap Index—has averaged 4.9% per year over the past two decades. This gulf in returns has even crested double digits a couple of times.

The chart shows randomness in the winning index year to year. All three indices have taken their turn as the top and bottom performer. None stands out as a “better” way to capture small caps. Funds tracking any of these indices may leave returns on the table due to indexing constraints, such as arbitrary rebalancing frequency and lack of a daily process.

Exhibit 1 – Three’s Company Annual (index returns, 2004– 2023)

A horizontal bar chart showing the percentage difference between highest and lowest returns for various investment indices from 2005 to 2016. Each bar represents a year and is segmented into five indices: S&P Star, CapGlob Index, HFRXED Hedged, MSCI World, and CSFB L/S. Color gradients range from dark blue (higher returns) to yellow (lower returns). The bottom of the chart indicates that the average difference is 4.92%.

Past performance is not a guarantee of future results.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

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About the Author Doug Finley

Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.

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