S&P 500 vs. Russell 1000: What's the Difference?

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. 

Key Takeaways

  • 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.

In total, the Russell U.S. indexes account for approximately 99% of the U.S. equity market. The largest 1,000 stocks go into the Russell 1000 Index, representing 93% of the total U.S. equity market. 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 is 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.

Index Eligibility

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 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 500

S&P Dow Jones Indices determines the eligibility requirements for its Total Market Index and ranks them by float-adjusted market capitalization (or market cap for short). The market cap represents the company's total value and is calculated by multiplying the total number of its outstanding shares by its current stock price.

To be considered for inclusion in the S&P 500, companies must usually have $13.1 billion or more in market cap. As of December 2021, the S&P 500 had a $34 billion median market cap, and the companies represented approximately 80% of the U.S. equity market.

Although it can vary, depending on the particular type of S&P index—such as the S&P 1500 or S&P 500—companies usually are required to have generated positive net income or earnings for the sum of the previous four consecutive quarters, including the most recent quarter.

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.

Russell 1000

The FTSE Russell organization uses a rules-based approach to selecting the stocks in the Russell 1000. The largest 4,000 stocks by total market cap are included in the Russell 3000E, which represents the broader equity market. Those 4,000 stocks are ranked in descending order by total market capitalization, with the top 1,000 stocks making up the Russell 1000 index.

More detailed rules apply for stocks near the inclusion threshold, meaning the index might include slightly more or less than 1,000 stocks. Typically, companies with less than $30 million in market cap are not eligible for inclusion in any of the Russell U.S. indexes.

As of November 2021, the Russell 1000 had an average market cap of $603 billion and a median market cap of $14.45 billion. The Russell 1000's mid-cap composition is represented by the median market capitalization of its stocks, which is important since mid-cap stocks typically maintain a higher-risk, higher-return potential profile. As a result, the Russell 1000 index is usually considered to be slightly more volatile than the S&P 500.

Index Rebalancing

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 initial public offering (IPO) additions and float updates. Update frequency can affect how well mutual funds and ETFs benchmarked to an index may perform relative to these market averages.

Performance and Volatility

Although 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.

SPY vs. IWB
SPY vs. IWB showing dividend-adjusted returns.

Article Sources

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