S&P 500 ETF vs. Russell 2000: what’s the difference?


S&P 500 vs Russell 2000 ETFs: an overview

If you find yourself on the conservative side of the active vs. passive spectrum, then investing in exchange traded funds (ETFs) may be a way to go. You might not beat the market, but you will definitely be close to matching it. Here, we’ll focus on ETFs that track two of the most popular indices, the S&P 500 and the Russell 2000.

Key points to remember

  • The S&P 500 and the Russell 2000 are two popular indices.
  • Many investors view the S&P 500 as the pulse of the US stock market.
  • Russell 2000 ETFs closely follow the Russell 2000 Index, which combines 2,000 small-cap companies in the Russell universe of 3,000 stocks.

S&P 500 ETF

The Standard & Poor’s 500 (S&P 500) is a market capitalization weighted index of some of the largest publicly traded US companies. Most analysts consider the S&P 500 to be the best indicator of the US stock market. This index is a benchmark index commonly used by many portfolio managers, mutual funds and exchange traded funds.

The three most commonly traded ETFs that track the performance of the S&P 500 Index are:

  1. State Street SPDR S&P 500 ETF Trust (SPY)
  2. BlackRock iShares Core S&P 500 ETF (IVV)
  3. Vanguard S&P 500 ETF (VOO)

The common theme for all three funds is, of course, the index they track, the S&P 500. Many investors see this index as the pulse of the US stock market. It is calculated using the market capitalizations of the more than 500 largest US companies whose shares are listed on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. The components of the index are selected by a committee, which takes into account criteria such as market capitalization, liquidity, financial viability, duration of trading and other factors.

The oldest and most popular of the three ETFs is SPY. The fund‘s expenses are 0.09%. While this expense is negligible in a broader asset management context, it is the highest among the three competitors. Even despite the higher expenses, the fund has superior liquidity, with an average daily trading volume 30-60 times that of IVV and VOO.

When comparing the performance numbers of the three, represented by the returns to net asset value (NAV), the three have slightly underperformed the S & P500 index over the past 10 years. VOO is the newcomer to the block with a fund creation date of September 9, 2010, so it has fewer years of data to consider. The SPY returned the lowest of the three funds. Expect a drop in return since it has the highest expense ratio among the three ETFs. Also, it should be understood that the funds compare to the S&P 500 Index with virtually no friction.

SPY is also structurally different from IVV and VOO in that it is organized as a mutual fund (UIT) with restrictions on lending the underlying stocks to other companies. In addition, all dividends from the constituents of SPY for the period are collected and held in cash until distribution, while IVV and VOO allow reinvestment of dividends.

Russell 2000 ETF

On the other side of the spectrum is the Russell 2000 Index which tracks the performance of approximately 2,000 US small-cap companies. Like the S&P 500, the index is weighted and is used regularly as a benchmark.

As the name suggests, the Russell 2000 ETFs closely follow the Russell 2000 Index, which combines 2,000 small-cap companies in the Russell universe of 3,000 stocks. The Russell 3000 tracks nearly 98% of all publicly traded US stocks.

The S&P 500 and Russell 2000 indices are both market capitalization weighted. Unlike the S&P 500 Index, however, stocks in the Russell 2000 Index are not selected by a committee, but rather by a formula based on their market capitalization and current index membership.

The most notable ETFs that track the Russell 2000 Index, in order of importance, are:

  1. BlackRock iShares Russell 2000 ETF (IWM)
  2. Vanguard Russell 2000 ETF (VTWO)
  3. Direxion Daily Small Cap Bull 3x Equities (TNA)

Here again, Blackrock’s higher IWM liquidity appears to lead to its higher expense ratio. Compared to S&P 500 ETFs, however, all funds that track the Russell 2000 Index charge higher fees despite their much lower overall liquidity.

IWM is the most widely traded Russell 2000 ETF, but it trades at only a quarter of the SPY volume of SPDR. The higher fees for the Russell 2000 ETFs are likely due to the increased management effort to periodically balance a greater number of securities.

Russell 2000 ETFs may look more attractive than S&P 500 ETFs at the start of a bull market. Russell 2000 constituents should on average outperform their big brothers in the S&P 500 index if the uptrend continues. The challenge is the volatility of their returns. So, as an investor, you may find yourself in a difficult situation.

Special considerations

The benefits of ETFs as an attractive investment for those who are content to match the return in a larger market at a fraction of the costs of active management. There are many ETFs to choose from for investors depending on the size, location or industry affiliation of the companies in the index.

Two of the most popular choices are the S&P 500 ETFs and the Russell 2000 ETFs. The main distinctions between them are determined by the size of the companies in the index they track (large caps for the S&P 500 and small caps for the Russell. 2000), the volatility of the underlying index, the method of selection of constituents and fees. they charge.


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