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S&P 600 Small Cap Index: A Good Choice For Small Cap ETF Investing

|Includes: iShares Core S&P Small-Cap ETF (IJR), SLY, VIOO

The Standard and Poors Small Cap 600 Index has out-performed other small-cap indexes during the past year. Table 1 shows the performance of 4 major small cap indexes over several time periods.

Table 1 Small Cap ETF Performance Relative to Russell 2000 April 30, 2016 (Percent)

   

1 Month

3 Months

6 Months

1 Year

Russell 2000

IWM

+1.97

+9.57

-2.21

-7.82

S&P 600

IJR

+1.41

+10.67

+1.14

-1.65

vs. IWM

 

-0.55

+1.00

+3.43

+6.70

CRSP (Vanguard)

VB

+2.12

+11.23

+0.05

-5.47

vs. IWM

 

+0.15

+1.51

+2.31

+2.56

Dow Jones (Schwab)

SCHA

+2.22

+11.18

-0.50

-6.42

vs. IWM

 

+0.24

+1.47

+1.75

+1.52

The period ended April 30, 2016 is interesting because it includes the 2015 market peak and two significant sell-offs and recoveries. The 1-Year period was a down market for all of the indexes, but significantly less so for the S&P 600 (NYSEARCA:IJR), which out-performed all of the other indexes by a wide margin.

The 3-month and 1-month periods tell a different story. The 3-month period includes all of the bounce from the February low. During this time, IJR performed better than the Russell 2000 (NYSEARCA:IWM), but lagged both the CRSP (NYSEARCA:VB) and Dow Jones (NYSEARCA:SCHA) indexes. The 1-month period was a topping period, when all of the indexes peaked and then started to pull back. During this time IJR lagged all of the other indexes.

The way that IJR has performed over the past year is similar to a defensive stock. Although it was still down during the down market period, it was down much less than the other indexes, and lagged during the up market.

What accounts for this performance? In addition to other eligibility requirements that are stronger than other index providers, Standard and Poors is the only index provider to employ a financial viability requirement. For a stock to be included in the index, the sum of the company's as-reported GAAP earnings for the previous four quarters must be positive, and the most recent quarter GAAP earnings must also be positive. The effectiveness of this screen is clearly evident in Table 1. But before you buy the S&P 600, take a look a table 2.

Table 2. Peak To Trough Performance

 

S&P 600

Russell 2000

Dec high - Feb low

-17.4%

-20.8%

Feb low - April high

+20.3%

+20.96%

April high - May 19

-5.3%

-5.2%

Dec high - May 19

-5.75%

-9.11%

Table 2 shows the huge swings in prices that occurred during the sell-off, recovery, and subsequent pull-back that occurred from December, 2015 to May, 2016. By both measures (Table 1 and Table 2), the S&P 600 did better than the Russell 2000, but it still lost money. And although the S&P 600 may seem somewhat defensive in nature, it is still subject to significant volatility in the market, which is not apparent from Table 1.

If you are seeking broad exposure to the small-cap market, the S&P 600 Small Cap Index is a good choice. In addition to the iShares ETF IJR, it is available in ETFs from SPDR (NYSEARCA:SLY), and Vanguard (NYSEARCA:VIOO).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.