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Beacon Equity Research

S&P SmallCap 600 Index

Overview

The S&P SmallCap 600 Index invests in a basket of small-cap equities. A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion. The index was introduced in 1994 in an effort to represent a smaller segment of the market than the S&P MidCap 400 Index. Although it is not yet widely quoted, the S&P SmallCap 600 Index has been gaining popularity among investment managers as an efficient way to track or invest in a largely illiquid market segment.

Composition

The S&P SmallCap 600 Index consists of 600 small-cap stocks. Unlike the larger Russell 2000, which also tracks small-cap stocks, the S&P 600 has more stringent requirements for inclusion. Standard & Poor's adds new stocks to the index based not only on size, but also on financial viability, liquidity, adequate float size, and other trading requirements. This ensures that the index is comprised of higher-quality firms than its larger counterpart. Since the index contains only small firms, it represents a mere 3% of the value of the overall market. The S&P SmallCap 600 Index is market value weighted, meaning that larger firms have a greater influence on the index's performance than smaller firms. The index is relatively evenly distributed, as the top 10 holdings represent only 5% of the index's value. The index's current holdings range in size from $60 million to over $3 billion, with the average company boasting a market cap of around $750 million.

The table below lists the current top ten holdings in the S&P SmallCap 600 Index:
CompanyTickerWeight (%)
NVR Inc.NVR1.3%
Urban OutfittersURBN1.0%
Medicis Pharma.MRX1.0%
Inamed Corp.IMDC1.0%
IDEXX LabsIDXX0.9%
Massey EnergyMEE0.9%
Patina Oil & GasPOG0.9%
Roper Ind.ROP0.7%
CooperCOO 0.7%
Polaris Ind.PII0.6%
This table shows the top ten sectors represented in the S&P SmallCap 600 Index:
Sector% of Index
Financial Services19.4%
Healthcare14.6%
Industrial Materials13.2%
Hardware12.4%
Consumer Goods10.5%
Consumer Services7.4%
Energy7.1%
Media6.4%
Business Services4.9%
Software3.1%

Positives

Though not as widely followed as the Russell 2000, the S&P SmallCap 600 Index arguably contains a mixture of more stable and profitable firms. As a result, the S&P 600 has outperformed the Russell 2000 by an average of 3% per year throughout the past decade. In addition, it has outperformed the broader market by an even larger margin. As a result of this outstanding performance, the S&P SmallCap 600 Index is quickly becoming a favorite for fund managers and smaller investors.

Drawbacks

Roughly half as much money is invested in the S&P 600 relative to the larger Russell 2000. This makes the index much less liquid. While this is not necessarily a problem for small investors, it has kept the index from gaining popularity with some institutional managers.