Are all (market weighted)
#smallcap indices the same? Absolutely not - they differ much more than large cap indices!
All large cap indices are driven by the same dominant players. How many stocks they include and when they rebalance has only a very moderate impact.
For small caps, however, the picture looks very different:
👉 Each provider has a different definition of a small cap - the upper and lower cut-offs deviate substantially. Of roughly 2'100 stocks in the combined S&P Small Cap 600 and
#Russell2000 universe, less than 25% are overlapping.
👉 They have very different reconstitution policies. While this might seem like a trivial choice, strong gainers might grow to significant size, before they get reclassified.
👉 The devil is in the details: each provider has their own criteria regarding eligibility, corporate actions or free float, which is usually used to determine the index weights.
Thus, the
#TrackingError between different small cap benchmarks is surprisingly high. Especially in the small cap run up in July, there was a divergence of several percent between small cap indices.
#fintwit #quant