S&P 500 vs. Russell 1000: An Overview
The Standard & Poor's 500 Index (S&P 500) and the Russell 1000 Index both track stocks of publicly traded companies and are both considered large-cap stock indices. These two indexes are used as a benchmark for the overall stock market, because investors expect them to represent the strength of the largest U.S. companies. However, there are important differences in the eligibility requirements for their components, and in the procedure by which those components are included.
- The S&P 500 and Russell 1000 are both large-cap stock indices.
- The S&P 500 includes only large-cap stocks, while the Russell 1000 contains some companies in the mid-cap range.
- The Russell 1000, perceived by investors as being more volatile than the S&P 500, though the differences are historically minor.
S&P 500 vs. Russell 1000
Outside of the Dow Jones Industrial Average (DJIA), the S&P 500 is the best-known barometer for large-cap stocks in the United States. The index has been around since 1923 but assumed its present format in 1957. As the name suggests, it is composed of 500 publicly-traded large-cap stocks. It is designed to measure the market performance of U.S. stocks trading on U.S. exchanges. The index is used as the benchmark for hundreds of mutual funds and exchange-traded funds (ETFs).
The Russell 1000 is a relatively newer index, having started in 1984. It is also less well-known than the S&P 500, but it represents a similarly broad stock market performance. Administered by FTSE Russell, it is a subset of the broader Russell 3000 Index, which includes 3,000 stocks accounting for approximately 98% of total stock market capitalization. The largest 1,000 stocks go into the Russell 1000 Index, and the smaller 2,000 go into the more well-known Russell 2000 small-cap index.
With one index holding 500 stocks and the other holding roughly 1,000, the composition of the two indices are clearly different. While the S&P 500 is composed exclusively of large-cap stocks, the Russell 1000 collects some mid-cap stocks to fill out its portfolio composition. S&P 500 components currently have a minimum market cap of over $13 billion, while the Russell 1000 components have a minimum of $2 billion.
The S&P 500 and Russell 1000 identify the index components with different procedures. Both begin by specifying the eligibility requirements of being included in a larger, more universal index, and then proceed to collect a subset of the universal index as the final list of components. To be included, both indices require that their components be defined as "U.S. companies." They both look at factors such as where the company is headquartered, where it derives revenue, and where most of its assets are located. Stocks must also trade on either the New York Stock Exchange (NYSE) or the NASDAQ.
S&P Dow Jones Indices determines the eligibility requirements for its Total Market Index and ranks them by float-adjusted market capitalization. A committee composed of full-time professionals from this organization meets monthly to determine which 500 of the Total Market Index will be included in the S&P 500. The committee’s decisions are confidential and may or may not follow the top 500 ranked stocks.
By contrast the FTSE Russell organization uses a rules-based approach to selecting the stocks in the Russell 1000. First it determines the eligibility requirements for the Russell 3000E (which actually contains around 4000 stocks). Second, the rules rank those stocks by float-adjusted market capitalization. Third, the top 1000 stocks are included in the list. Fourth, more detailed rules apply for stocks near the threshold, so the index might include slightly more or less than 1000 stocks.
Stock prices change every minute of every business day. Therefore, publicly-traded company values are constantly changing, and it is up to an index's administrators to keep up with these changes to reflect the current times. The process of changing the weighting of assets in a portfolio is called rebalancing. However, the S&P 500 and Russell 1000 change on different schedules.
The S&P 500 rebalances its portfolio on a quarterly basis, and is reconstituted annually. In addition to this, the committee review process may approve ad-hoc changes at any point after one of their monthly meetings. The Russell 1000 is fully reconstituted once a year at the end of the second quarter. The index will also make quarterly changes as a result of IPO additions and float updates.
Update frequency can affect how well mutual funds and ETFs bench-marked to an index may perform relative to these market averages. However, it is notable that though these indexes have clear differences in construction and eligibility, the performance and volatility metrics are strikingly similar. The chart below shows how the indexes are more than 94% correlated over a 20-year period, and how the dividend-adjusted performance of these indexes is also quite similar.
The Russell 1000's mid-cap composition is shown by the median market capitalization of its stocks. As of January 2021, the S&P 500 had a $25.6 billion median market cap, compared to the Russell 1000's $12.4 billion median market cap at the end of December 2020. This distinction is important because mid-cap stocks generally maintain a higher-risk, higher-return potential profile. This is perhaps the biggest reason why investors expect the Russell 1000 Index to be slightly more volatile than the S&P 500.