|Sidebar: Index Comparison S&P Super Composite 1500 vs. Russell 3000
A summary of a research paper from State Street Global Advisors:
Is the Super Composite Super?
A Comparison of the S&P 1500 with the Russell 3000
By: Arlene Rockefeller
July 3, 2002
Since its inception at the end of October 1994, the S&P 1500 Super Composite the aggregation of the S&P 500, the S&P Midcap 400 and the S&P Small Cap 600 has outperformed the Russell 3000 Index by a total of 9%. Oftentimes different indexes tracking the same market segment (in this case the total U.S. stock market) can end up performing differently.
For the years 1994-2001, State Street Global Advisors looked at how the S&P Super Composite 1500 stacked up against the Russell 3000 on an annual basis.
Source: Wilshire, SSgA 2002
The Russell 3000, which digs deeper than the S&P Super Composite 1500, has a small-cap bias yet it underperformed when small-caps were in favor in 2000 and 2001. SsgAs analysis showed that index market cap was not the major source of outperformance for the Super Composite. Style bias was also a factor that did not have a significant impact.
The major reasons the S&P 1500 out performed the Russell 3000 were underweights to Computer Services and Telecom, as well as fewer high risk companies without positive net income for at least 4 quarters.
The time period of the study is relatively short and only contains two full years when small cap securities outperformed, however, it does appear that the Standard and Poor's methodology of screening stocks before addition adds value. They are committed to avoiding firms that go bankrupt soon after addition and thus screen for companies with at least a year of positive net income on an operating basis. Russell does not use this type of screen and this was the single most influential factor in S&P outperformance. In addition, there may be some small impact from the S&P 500 Effect, since more money is indexed to the S&P 500 than any other index, companies added to it tend to move up in price. These companies usually come from the S&P Midcap or Small Cap Indices, thus the S&P 1500 already owns these additions ahead of time. Nearly all would also be in the Russell 3000, but if they are owned in less than full cap weight, the impact would be less.
The most important thing to consider, however, is that each index is a portfolio. How it performs relative to other indexes needs to be analyzed carefully, looking at many factors, not just one or two. Just as with active portfolios, past performance, if its sources are not understood, can be a misleading indicator of future performance.