What is the Russell Small Cap Completeness Index?
The Russell Small Cap Completeness Index is a market capitalization weighted index composed of Russell 3000 stocks that are not included in the Standard & Poor’s 500 index. By constructing it this way, investors have a large basket of small- and mid-cap assets that are uncorrelated to widely held stocks like Apple (AAPL) and Amazon (AMZN). Each year, FTSE Russell replenishes the index to remove companies recently eligible for the S&P 500. This ensures that the index remains uncorrelated to the broader market and helps minimize losses in the event of a downturn.
Key points to remember
- The Russell Small Cap Completeness Index includes small and mid cap stocks that are part of the broad Russell 3000 Index but are not part of the S&P 500.
- By owning the Completeness Index plus the S&P 500, investors have access to a wide range of non-overlapping stocks.
- Investors can buy the index via ETFs that track it.
How the Russell Small Cap Comprehensiveness Index works
The Russell Small Cap Comprehensiveness Index varies in size; the largest company has a market capitalization of around $104 billion, while the average company is $1.3 billion.A significant portion of the holdings operates in the financial services, consumer discretionary and technology sectors. And unlike most other indices, much of the price movement is determined by each sector. In fact, some of the top holdings include Uber (UBER), Square (SQ) and Spotify (PLACE), each of which does business outside of the tech sector.
Adding the Russell Small Cap Completeness Index to a portfolio typically requires purchasing an exchange-traded fund (ETFs). As of December 2020, the index outperformed the Russell 3000 over periods of one, three and five years.Year-to-date, equities are around 5% higher, outperforming the benchmark by almost 4%.
Benefits of the Russell Small Cap Completeness Index
The benefits of investing in assets uncorrelated to the general market cannot be underestimated. It offers investors greater diversification and a way to protect against downside risk. Building a portfolio with uncorrelated assets also allows the movement of one asset to partially offset the decline of another, thereby reducing the average volatility of a portfolio. This is a fundamental method to reduce large variations between companies, otherwise known as unsystematic or diversification risk. Sometimes buying uncorrelated assets does not result in a winning situation. In the event of a systemic crisis, comparable to the recent recession, most assets are exposed to high volatility.
Another benefit of this approach includes the ability to capture returns from outperforming assets and reinvest profits into underperforming ones. The Russell Small Cap Completeness Index and other similar assets serve as a reminder that uncorrelated returns can protect a portfolio when large-cap stocks fall.