The S&P SmallCap 600^® represents the U.S. small-cap equity market by tracking companies that meet specific liquidity and financial viability criteria. While both the S&P 600^® and Russell 2000 target this segment, their performance has diverged significantly. Since 1994, the S&P 600—built on a rules-based methodology—has consistently outperformed the Russell 2000, delivering a 1.6% higher average return with lower volatility, resulting in a 0.1 improvement in risk-adjusted performance. This gap widened over longer periods (see Exhibit 1).

(Click on image to enlarge)

A key driver of this outperformance has been the S&P 600’s statistically significant exposure to the quality factor, which explains about 74.7% of its historical outperformance. Unlike the Russell 2000, the S&P 600 applies an earnings screen that requires consistent profitability for new constituents—a feature historically linked to outperformance in small caps. This analysis explores whether that screen has underpinned the index’s quality tilt (see Exhibit 2).

(Click on image to enlarge)

To test this, we used the S&P United States SmallCap Index, which seeks to measure the performance of all constituents in the S&P United States BMI classified as small cap, to construct four hypothetical compositions.¹

• Float Composition: Securities with at least 10% public float.²
• Liquidity Composition: Securities with at least 75% annual dollar value traded relative to float-adjusted market cap, with at least 250,000 shares traded monthly.
• Earnings Composition: Securities with positive as-reported earnings over the past four quarters.
• Blended Composition: Securities meeting all three criteria.

Only the earnings and blended compositions showed strong positive quality factor loadings and superior long-term returns—highlighting profitability as the main contributor to the S&P 600’s quality tilt (see Exhibit 3).

(Click on image to enlarge)

These compositions also aligned with key S&P Quality Index metrics—higher ROE, better earnings quality and lower leverage—closely resembling the S&P 600, while the Russell 2000 lagged (see Exhibit 4).

(Click on image to enlarge)

Conclusion

The S&P 600’s consistent historical outperformance over the Russell 2000 has stemmed from its earnings-based quality tilt. By requiring a profitability screening, the index tracks small-cap companies with strong and stable fundamentals. This underscores the importance of index design and why index construction matters—quality, in this case, is built by design.

¹ To avoid survivorship and look-ahead bias, we included both active/inactive securities and lagged fundamental data by 45 days. Back-testing ran from December 2002 to May 2025, with quarterly rebalancing. Compositions were equally weighted, though results were consistent under cap weighting.

² The public float criterion for the S&P SmallCap 600 was 50% prior to April 30, 2019.

More By This Author: