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TalkingPoints: Introducing the S&P Global SmallCap Select Index Series How does earnings’ quality and liquidity influence risk/return?
BY Michael Orzano

Get a smoother ride in global small caps by excluding companies without a track record of positive earnings.



1. Why is the S&P Global SmallCap Select Index Series being introduced now?



Prior research has demonstrated that profitability matters for small-cap companies in the U.S. For example, the S&P SmallCap 600®—which includes earnings eligibility criteria—has outperformed the broader Russell 2000 Index (with lower volatility) for more than 20 years. Our new S&P Global SmallCap Select Index Series extends this phenomenon to global equity markets where we have found that a similar effect exists. Simply put, small-cap companies without a track record of generating earnings have performed poorly relative to their profitable peers and have thus been a drag on broad smallcap indices.



2. How do the S&P Global SmallCap Select Indices work?



Each index is a subset of the small-cap segment of the S&P Global BMI. In order to be eligible for inclusion, companies must post two consecutive years of positive earnings per share. Likewise, companies are dropped from the index after posting two consecutive years of negative earnings. In order to improve the replicability of the indices, we also eliminate the smallest and least liquid 20% of companies within each country by float market cap and median daily value traded. The indices are weighted by float market cap and are rebalanced semiannually in June and December.

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