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Big Things Come in Small Packages:

Looking Into the S&P SmallCap 600®

By Jodie Guzberg

INTRODUCTION

Big Things Come in Small PackagesA recent paper by FTSE Russell rightly pointed out the well-timed launch of the Russell 2000® in 1984, an index meant to measure the small-cap segment of the U.S. equity market.1 The launch was on the back of breakthrough research by Rolf Banz finding that “smaller firms have had higher risk-adjusted returns, on average, than larger firms.”2 At the time, the launch of this benchmark enabled Russell Investment’s consulting clients to gauge the success of small-cap managers.

However, it was not until the early 1990s when the “small-cap premium” concept was really solidified. Nobel Prize winner Eugene F. Fama and co-author Kenneth R. French introduced the three-factor model of market risk, value, and small-cap factors that now serves as the foundation for much of the current research on the topic.3 Following this research, the S&P SmallCap 600 was launched in 1994.

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1FTSE Russell, “Getting Defensive About the Small Cap Premium”, February 2016. https://www.ftserussell.com/sites/default/files/research/getting_defensive_about_the_small_cap_premium_final.pdf

2Banz, R., “The Relationship between Market Value and Return of Common Stocks,” Journal of Financial Economics, 1981.

3 Fama, E., and K. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance, 1992; Fama, E., and K. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics, 1993.

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