A:

When creating a stock portfolio, it is important to have a benchmark against which you can compare your returns. Comparing against a benchmark allows an investor to accurately gauge the actual performance of his or her portfolio. For example, an annual portfolio return of 15% may seem substantial, but if the portfolio's benchmark achieves an annual return of 20% over the same time period, the 15% return may actually be less than optimal.

The best way to find a proper benchmark for your portfolio is to look for an index that is comprised of equities that are similar to those in your portfolio. Therefore, although the Dow Jones Industrial Index (DJIA) is one of the most famous indexes, it is not a small-cap index and should not be compared against a small-cap portfolio. One of the best indexes to use as a benchmark for small-cap performance is the Russell 2000 Index.

The Russell 2000 index was created by the Frank Russell Company and it is currently comprised of 2,000 small-cap companies. These companies are U.S. equities that come from a wide variety of industries. According to Russell's July 2006 data, the average market cap of the Russell 2000 is $1.05 billion; the largest company is $2.357 billion in size and the smallest has a market cap of $95 million. The annual average return for the 10-year period of the index was 9.69%.

Another index that can be used to gauge the returns of a small-cap portfolio is the Standard & Poor's Small Cap 600 Index. The index is smaller than the Russell 2000, with only 600 equities. According to data released by Standard & Poor's in June of 2006, the average size of a company in this index is approximately $900 million, with the largest company weighing in at more than $3 billion and the smallest at a market cap of $60 million. This index has produced an annual average return of 13.6% over the past five years.

Along with index benchmarks, investors can also use a variety of small-cap focused mutual funds to compare their returns. Many mutual funds run by various companies focus on the small-cap segment of the market. However, when deciding which fund would be best used as a benchmark, an investor should first read the fund's investment strategy to ensure the comparison will be accurate.

To learn more, see Index Investing, Indexes: The Good, The Bad And The Ugly and What Is A Small Cap?

RELATED FAQS
  1. Which is the best index to use to study the possible future price action of a given ...

    It is a smart idea to study the movements of a broad-based index of companies before making an investment decision. Specifically, ... Read Answer >>
  2. What are the pros and cons of using the S&P 500 as a benchmark?

    Learn about the advantages and disadvantages of using the S&P 500 as a benchmark for portfolio performance, and understand ... Read Answer >>
  3. The BEST definition of a benchmark portfolio is:

    The BEST definition of a benchmark portfolio is: a) A preset list of securities to be used to compare the performance of ... Read Answer >>
  4. Why should I be looking at small cap stocks as a potential investment?

    Discover the role of small-capitalization stocks in an equity portfolio, and learn why investors take on additional risk ... Read Answer >>
  5. What are the most important equity market indexes?

    Discover the most important equity market indexes. Stock market indexes are tools to evaluate the performance of the stock ... Read Answer >>
  6. How do the risks of large cap stocks differ from the risks of small cap stocks?

    Understand the important differences between large- and small-cap companies that make small-cap firms a more risky equity ... Read Answer >>
Related Articles
  1. Investing Basics

    What's a Benchmark?

    A benchmark is a standard investors choose to gauge the performance of their portfolios.
  2. Mutual Funds & ETFs

    5 Best US Small-Cap Index Mutual Funds

    Read about different small-cap mutual funds that are available for investors. Learn about how the small-cap indexes have higher volatility.
  3. Mutual Funds & ETFs

    Benchmark To Show Winning Returns

    You can't win if you don't keep score. Read on to learn how to measure your returns.
  4. Professionals

    Other Terms

    FINRA/NASAA Series 66: Section 2 Other Terms. This section discusses measures of portfolio return: risk premium, expected return and benchmark portfolios.
  5. Investing Basics

    How to Use a Benchmark to Evaluate a Portfolio

    What is an investment benchmark and how is it used to evaluate the risk and return in a portfolio.
  6. Investing Basics

    How the S&P 500 and Russell 2000 Indexes Differ

    The S&P 500 and Russell 2000 are used as benchmarks for broader segments of the U.S. stock market. Each index has its own approach to measuring stocks.
  7. Mutual Funds & ETFs

    IWM vs. VTWO: Comparing U.S. Small-Cap ETFs

    Find out how two of the largest small-cap exchange-traded funds, the iShares Russell 2000 and the Vanguard Small-Cap ETF, compare with each other.
  8. Mutual Funds & ETFs

    Index Investing: The Russell 2000 Index

    The previous four indexes we covered were all based on the top companies in the U.S., most of them worth billions of dollars. The Russell 2000 measures the performance of smaller stocks (small ...
  9. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
  10. Mutual Funds & ETFs

    The Top 3 Small Cap ETFs for 2016 (VBR, DES)

    Obtain detailed information on three of the most promising small-cap exchange traded funds (ETFs) that could outperform for investors in 2016.
RELATED TERMS
  1. Russell 2000 Index

    An index measuring the performance approximately 2,000 small-cap ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's ...
  3. Benchmark

    A standard against which the performance of a security, mutual ...
  4. Active Return

    The percentage gain or loss of an investment relative to the ...
  5. S&P 600

    An index of small-cap stocks managed by Standard and Poor's. ...
  6. Russell 1000 Index

    An index of approximately 1,000 of the largest companies in the ...

You May Also Like

Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center