What it means
An index is a basket of shares that gives a single number for how a market segment is performing. The S&P 600 covers the small-cap segment, meaning companies with a smaller total market value than the large firms in the S&P 500 and the mid-sized firms in the S&P MidCap 400.
Together, those three indices form the S&P Composite 1500, which covers most of the US stock market by value. A feature that sets the S&P 600 apart is its quality screen.
A company must have positive earnings, based on the sum of its most recent four quarters and its latest quarter, to be added. This tends to keep loss-making and speculative companies out of the index.
Companies are chosen by an index committee rather than by a purely mechanical rule. The committee also considers the size, liquidity (how easily the shares trade) and the share of stock available to the public.
This means the index can differ from a rule-based small-cap index that holds every company in a size range. For a finance professional the index serves three roles.
It is a benchmark for small-cap funds, a reference for how smaller companies are doing relative to larger ones, and the underlying basis for index funds and exchange-traded funds that track it. Small companies are more sensitive to economic cycles and borrowing costs, so the index is usually more volatile than large-company indices.
The profitability screen can soften some of that risk, but it does not remove it, and investors should expect larger swings than in the S&P 500. Because profitability is checked when a company joins, the index can look different from peers over a full cycle.
A company that later starts losing money is not automatically removed, but the committee can drop it if it no longer fits the criteria. Investors should therefore expect gradual changes to the list rather than a sudden clear-out.
In practice
Real-world examples.
Example
A fund manager running a small-cap fund of $80,000,000 compares her one-year return of 10% against the S&P 600 return of 7%. She tells investors that she beat the benchmark by 3 percentage points.
Example
An investor who wants exposure to smaller, profitable companies chooses an exchange-traded fund that follows the S&P 600. He prefers it to funds that include loss-making firms.
Example
A founder preparing to take her manufacturing business public looks at the S&P 600 to see how similar listed companies are valued. The comparison helps her set a realistic valuation range, because she can see the earnings multiples that investors currently pay for similar-sized profitable businesses.
Formula
Calculation
Index level = Total float-adjusted market capitalisation of all members / Index divisor.
Suppose the total float-adjusted value of the members is $60,000,000,000 and the divisor, a number S&P adjusts to keep the index continuous when companies are added or removed, is 20,000,000. The index level is $60,000,000,000 / 20,000,000 = 3,000. If the total value rises 5% to $63,000,000,000, the new index level is $63,000,000,000 / 20,000,000 = 3,150, which is also 3,000 x 1.05. The divisor changes only when the make-up of the index changes, such as when a company is added or removed, and it is not changed by ordinary price moves.Case study
Seen in the real world.
Linden Park Trustees is an entirely fictional pension fund for a regional bus company. In this illustrative story, the trustees want to add a small-company allocation but worry about holding unprofitable firms.
Their adviser suggests the S&P 600 as a benchmark because it requires positive earnings, and recommends a low-cost fund that tracks it. The trustees allocate $4,000,000 to the fund, or 5% of the $80,000,000 portfolio.
Over the first two years, the small-company allocation trails large companies in one year and leads in the next. The illustrative lesson is that the trustees chose the benchmark deliberately and held it through the swings, knowing the exposure was meant for the long term. The adviser also noted that the profitability screen did not stop the index from falling in a market downturn, so the trustees kept their expectations realistic.
Watch out
Common mistakes.
- Assuming the S&P 600 holds every small US company, when it holds a selected group of 600.
- Believing that profitable small companies are low risk, when they are still more volatile than large ones.
- Confusing the S&P 600 with the S&P 400 or the Russell 2000, which cover different groups of companies.
Questions
People also ask.
Is the S&P 600 the same as the Russell 2000?
No, the Russell 2000 is rule-based and holds 2,000 companies, while the S&P 600 uses a committee and a profitability test.
What is the S&P Composite 1500?
It combines the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600.
How can I invest in it?
You cannot buy the index itself, but you can buy funds and exchange-traded funds that aim to track it.
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