Small-Cap US Equity Indexes
In Figure 3, we examine small-cap U.S. equity indexes. The annual difference between best- and worst-performing small-cap value indexes ranged from 146 bps in 2010 to 1,970 bps in 2009. The dramatic performance variance in 2009 suggests that the methodology for measuring the small-cap value U.S. equity market is fundamentally different between Russell and Morningstar.
Small-cap blend indexes also demonstrate significant variance in performance, ranging from 231 bps in 2010 to 1,636 bps in 2009. It is interesting that the bookends of performance variation occurred in adjacent years.
The performance variation among small-cap growth indexes exceeded 1,500 bps in three separate years (2002, 2003 and 2009). In 2002, the S&P SmallCap 600/Citigroup Growth Index had a return of -15.4 percent, while the Morningstar Small Growth Index had a -36.9 percent return—producing a performance differential of 2,151 bps. By any reasonable guideline, that amount of difference between two indexes measuring the same slice of the U.S. equity market is astonishing.
Do these differences in individual indexes really matter? Yes, but only if a person invests very "narrowly." For instance, if my investment portfolio consisted entirely of small-cap growth U.S. stock, I would want to mimic the S&P SmallCap 600/Citigroup Growth Index rather than the Morningstar Small Growth Index (at least, based on historical returns). But if my investment portfolio is a broad assortment of asset classes (i.e., a broad array of indexes), the differences between individual indexes within the same asset class are not a highly significant issue. This assertion will be demonstrated next.