Active Versus Passive Index Management: A Performance Comparison of the S&P and the Russell Indexes
Posted: 10 May 2006 Last revised: 15 May 2008
The S&P and the Russell indexes often serve as proxies for passive portfolios in the debate over the merits of active versus passive portfolio management. However, the S&P indexes, are, in effect, actively constructed portfolios, since S&P index managers exercise discretion in selecting firms for the indexes from a pool of eligible firms. In contrast, Russell index managers use a passive, nondiscretionary approach and select firms solely based on market capitalization. I assess the relative merits of these approaches by comparing their performance over the last 11 years. I find that the S&P indexes dominate the Russell indexes, particularly in the small-cap sector, where the S&P 600 index consistently outperforms the Russell 2000 index. The results suggest that index investors would benefit by choosing actively constructed index portfolios over passively constructed index portfolios, particularly in the small-cap sector.
Keywords: S&P 600, Russell 2000, index comparison
JEL Classification: G14, G20, G23
Suggested Citation: Suggested Citation