A Tale of Two Benchmarks
12 Pages Posted: 24 Jun 2009
Date Written: June 22, 2009
It is well documented that the returns of two leading small-cap benchmarks, the S&P SmallCap 600 and the Russell 2000, have diverged over the last 15 years. In this study, we used attribution frameworks to understand the return differential between the two indices. The analysis shows that approximately half of the excess returns are attributable to the impact of the July effect, which is caused by the annual Russell reconstitution in June. We expect this effect to moderate over time due to enhancements made to Russell’s rebalancing process. The remaining excess return can be explained by the following: (1) The results from Brinson performance attribution model suggest that while there is little impact of sector allocation between the S&P SmallCap 600 and the Russell 2000, the composition of stocks within individual sectors contributes significantly to the performance differential. (2) The results from the Fama-French Three Factor model confirm that compared to the Russell 2000, the S&P SmallCap 600 has a higher exposure to value risk. (3) The higher value tilt is affected through the S&P SmallCap 600 requirement that additions must have positive earnings. In this paper, we demonstrate that such profitability screens have added to performance in a neutral universe.
Keywords: performance attribution
JEL Classification: C60
Suggested Citation: Suggested Citation