At first glance>, it s hard to figure: Two exchange-traded funds follow the same broad class of stocks but beget a huge difference in performance. Both iShares S&P SmallCap 600 and iShares Russell 2000 track indexes of small firms. But over the past nine years, the S&P SmallCap 600 returned 56 percent, while the Russell 2000 returned 23 percent. Indeed, since 1994 the S&P 600 index has beaten the Russell by, on average, about two percentage points a year, according to a recent study.
Rolf Agather, director of business development at Russell Indexes, doesn t dispute the study s findings but argues that his firm s product is a more accurate picture of the small-cap universe. The firm creates its index out of stocks that aren t big enough to make it into its large- or midcap universe or small enough for its microcap category. S&P is more selective, says Morningstar ETF analyst Bradley Kay, aiming not just for a representative group of small-cap stocks but also some of the best companies. Among other requirements, a company generally must have four consecutive quarters of profits to get into the S&P SmallCap 600.
The performance gap hasn t stopped the Russell-based ETF from piling up $10.7 billion in assets, more than twice the S&P-based ETF s assets. That s partly because institutions often prefer to use the widely followed Russell index. Those who want the broadest exposure to small stocks might want to follow suit. But investors who keep a close eye on total return might let S&P trim the field for them, says Tom Lydon, president of Newport Beach, Calif. based money-management firm Global Trends Investments.