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.
The Russell 2000 index was created by the Frank Russell Company and is comprised of approximately 2,000 small-cap companies. These companies are U.S. equities that come from a wide variety of industries. The average market cap of a Russell 2000 company is $2.53 billion, and the average annual total return of the index over the past 10 years was 9.5%.
Another index that can be used to gauge the returns of a small-cap portfolio is the Standard & Poor's SmallCap 600 Index. The index is smaller than the Russell 2000, with only around 600 equities. The average size of a company in this index is approximately $1.35 billion, and the index has produced an average total annual return of 11.03% over the past 10 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.