By Hamish Preston, Associate Director, Product Management, U.S. Equities for S&P Dow Jones Indices
Yesterday marked 25 years since the launch of the S&P SmallCap 600. Since then, the small-cap equity benchmark delivered an annualized total return of nearly 11% and has become the basis for many investment strategies; around USD 73 billion was indexed to the S&P SmallCap 600 as of the end of 2018. And if we assume that these indexed assets would have otherwise been given to active funds, the rising adoption of the S&P SmallCap 600 helped to save around USD 5 billion in fees between 1996 and 2018.
One of the principal reasons for the growing popularity and awareness of the S&P SmallCap 600 has been its historical performance. Index construction matters in U.S. small-caps: the S&P 600’s profitability criterion gives it a quality bias, which helped it to consistently outperform other small cap indices such as the Russell 2000 and made it a harder benchmark to outperform for active managers.
More recently, for those seeking to take shelter from the trade winds buffeting the blue-chip, internationally diversified names leading the S&P 500, small-cap stocks can offer a safe harbor or simply purer exposure to the U.S. economy. Smaller stocks typically have a higher proportion of their revenues generated in home markets, and the S&P SmallCap 600 has a strong domestic bias compared to the S&P 500. The performance of the small-cap index over the last 12 months illustrates its close connections to the U.S. economic outlook.
After concerns over U.S. economic growth and future Fed policy weighed on the S&P SmallCap 600 towards the end of 2018, higher domestic revenue exposure provided a degree of insulation from the tariffs, which, in turn, helped the index to post its best-ever start to the year (+15.45% through the end of February).