A recent paper by FTSE Russell rightly pointed out the well-timed launch of the Russell 2000® in 1984, an index meant to measure the small-cap segment of the U.S. equity market.1 The launch was on the back of breakthrough research by Rolf Banz finding that “smaller firms have had higher risk-adjusted returns, on average, than larger firms.”2 At the time, the launch of this benchmark enabled Russell Investment’s consulting clients to gauge the success of small-cap managers.
However, it was not until the early 1990s when the “small-cap premium” concept was really solidified. Nobel Prize winner Eugene F. Fama and co-author Kenneth R. French introduced the three-factor model of market risk, value, and small-cap factors that now serves as the foundation for much of the current research on the topic.3 Following this research, the S&P SmallCap 600 was launched in 1994.
Although the S&P SmallCap 600 took an extra decade’s worth of research into account in its construction as a benchmark, the Russell 2000 is far more widely used. According to eVestment Alliance, as of June 30, 2017, 93% of small-cap funds and 81% of assets in the space are benchmarked to the Russell 2000, compared with 3% of funds and 5% of assets benchmarked to the S&P SmallCap 600.