You can make more money on small-cap stocks by playing this overlooked index

Small-cap stocks are where the action is these days, and you might have seen headlines saying the benchmark Russell 2000 Index has been hitting record after record.

But if you are looking for broad exposure to small-cap U.S. stocks, it pays to be more selective.

This was made quite clear when we recently looked at the best-performing small-cap sector — health care.

The Russell 2000 Index RUT, +0.02%  is made up of the (roughly) 2,000 smallest stocks, by market capitalization, of the Russell 3000 Index RUA, +0.39% The Russell 3000 “contains the largest 4,000 U.S. companies,” according to FTSE Russell’s methodology. That’s it. There’s no trimming for quality. You get the good with the bad.

But the S&P Small Cap 600 Index SML, +0.55%  has been a far better performer over just about any period you look at. First, here’s a five-year chart comparing the two:

FactSet

Here’s a 10-year chart:

FactSet

And now, 20 years:

FactSet

Here’s a table with more comparisons of total returns for the two indexes:

2018 through June 1 2017 3 years 5 years 10 years 15 years 20 years S&P 600 Small Cap Index 9% 13% 48% 97% 193% 462% 568% Russell 2000 Index 8% 15% 38% 79% 153% 356% 376% Source: FactSet

So the Russell 2000 Index beat the S&P 600 Small Cap Index during 2017. But for all the long-term periods, it’s pretty clear which one has done a better job bringing home the bacon.

Differences between the indexes

As you saw above, the Russell 2000 doesn’t really have any criteria restricting inclusion. As of the close on Friday, there were 15 stocks in the index with prices below a dollar and 39 below two dollars. Those numbers in themselves don’t mean very much. However, it’s generally a

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