SOURCE: Russell Investments

Russell Investments

October 10, 2014 10:29 ET

Small Cap Divergence: Smart Beta Indexes Reflecting U.S. Small- and Large-Cap Stocks Held Up Well Despite Russell 2000® Index Downturn Year-to-Date as of October 7; Russell Indexes

SEATTLE, WA--(Marketwired - Oct 10, 2014) - While some experts and industry pundits have expressed concern that the underperformance of small cap stocks in 2014, as reflected by the Russell 2000® Index, relative to the U.S. large cap stocks, as reflected by the Russell 1000® Index, may negatively impact "smart beta" indexes, this does not appear to be the case for certain Russell Indexes. Small cap smart beta indexes have outperformed the Russell 2000® Index in 2014 as of October 7 and large cap smart beta indexes, which tend to have a mid cap tilt rather than a small cap tilt, have not been dragged down by small cap underperformance, as the chart below illustrates.

Small cap smart beta index strategies have meaningfully outperformed the market cap weighted Russell 2000® Index in 2014. The Russell Fundamental U.S. Small Company Index, which measures the performance of U.S. small company stocks based on fundamental economic factors over market capitalization returned (-2.4%) year-to-date as of October 7 relative to a (-6.6%) return for the Russell 2000® Index. The Russell 2000® Low Volatility Index, which measures performance of a subset of small-cap U.S. equities with lower volatility returned (-0.8%) year-to-date as of October 7, relative to a (-6.6%) return for the Russell 2000® Index.

Large cap smart beta index strategies, helped in part by strong mid-cap stock performance, have also performed in line or better than their market cap weighted index counterparts in 2014 and haven't felt the "small cap effect." The Russell Fundamental U.S. Large Company Index returned 5.8% year-to-date as of October 7 relative to a 5.9% return for the Russell 1000® Index. And the Russell 1000® Low Volatility Index returned 6.9% year-to-date as of October 7 relative to a 5.9% return for the Russell 1000® Index.

"Given the robust performance of small cap stocks in 2013, the shift in leadership to large caps in 2014 has not been a surprise. The complementary nature of understanding both smart beta indexes and traditional market cap weighted indexes is illustrated in the performance of fundamental and low volatility indexes relative to their cap-weighted counterparts in 2014," said David Koenig, index investment strategist for Russell Investments. "Smart beta indexes and traditional market cap-weighted indexes represent an expanded toolkit for investors for understanding the behavior of various market segments over time and through market cycles."

2014 Year-to-Date "Smart Beta" Index Performance Relative to Market Cap: Russell Indexes

Russell Index YTD 2014 as of 10/7/2014
Russell 1000® Index  5.9%
Russell Fundamental US Large Company Index  5.8%
Russell 1000® Low Volatility Index  6.9%
Russell 2000® Index  -6.6%
Russell Fundamental U.S. Small Company Index  -2.4%
Russell 2000® Low Volatility Index  -0.8%

Source: Russell Investments. Returns are total returns (reflect reinvestment of dividends and distributions) and are denominated in U.S. dollars.

For more information on the Russell 2000® Index and the entire Russell Indexes family, go to the Russell Indexes website.

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Please note: Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Russell's publication of the Indexes or Index constituents in no way suggests or implies a representation or opinion by Russell as to the attractiveness of investing in a particular security. Inclusion of a security in an Index is not a promotion, sponsorship or endorsement of a security by Russell and Russell makes no representation, warranty or guarantee with respect to the performance of any security included in a Russell Index. 

Opinions expressed by Mr. Koenig reflect market performance as of October 7, 2014 and are subject to change at any time based on market or other conditions without notice. Past performance does not guarantee future performance. 

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

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Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.