Russell vs S&P SmallCap / BARRA Index?

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peteyperson
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Russell vs S&P SmallCap / BARRA Index?

Post by peteyperson »

I'm wondering which is better for slice and dice in the US equity markets?

Petey
Kramer
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Joined: Mon Aug 25, 2003 3:53 pm

Post by Kramer »

HI Petey,

The Russell 2000 index is changed once a year, the stocks with market cap ranking 1000-3000 in the US stock market. The S&P 600 index is chosen by committee and new entries (and drops) are announced each month.

It is a well known fact that traders try to arb the Russell 2000, buying stocks just before they enter the index, and selling afterwards. Also, there is more money in the 2000 than the 600, so there is more money for the arbs to make.

So for arbitrage reasons, the 600 is generally considered superior. The 2000 does have more style purity, though.

Also, the Vanguard funds (except for tax managed small cap which still uses S&P 600 i believe) use the MSCI indexes for small cap (recent transition from S&P -- Vanguard and S&P do not have good relationship). Based on what I have read, these MSCI indexes are probably even superior to the S&P, especially if you are just buying value or growth, because they try to make them stickier, eg, they won't place a fund from value to growth right away when it first passes some threshold, so as to reduce trading costs. Whereas S&P uses strictly book to market to differentiate value and growth and stocks can ping pong back and forth from year to year.

As for what I have done personally, I have a big chunk of IJS, which is ishares small cap 600 value from S&P. In Fama's work, book to market was an excellent proxy for value. Russell uses a more sophisticated criteria for value and growth than S&P.

Any of these indexes are fine, in terms of the quality of the index. LIke Bernstein has written, we are looking not for good stock pickers or good fund managers, but good transactional managers that minimize trading, tax, and arbitrage costs. IJS/IJR have advantage of being pure ETFs. Vanguard's small cap funds, once the Viper classes start this fall, will have most (but not all) of the same advantages as the pure ishares ETFs and probably a slightly better index.

One other subtle thing to look for with close calls like this when you are choosing an investment vehicle, is embedded gains within a fund. Other things being equal, you want to buy funds with a higher taxable basis than the competing funds, as that diminishes the probability of distributing gains before you sell (I do not plan to sell any investment I own before retirement). This is where ETFs shine. Sorry, Petey, but I don't know which parts of this post do and don't apply to UK citizens :wink:

Kramer
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson »

All of it. :lol:

Petey
Kramer wrote: Sorry, Petey, but I don't know which parts of this post do and don't apply to UK citizens :wink:

Kramer
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