What Should I Use as a Benchmark for My Small-cap Stock Portfolio?

By
Kesavan Balasubramaniam
Full Bio
Kesavan Balasubramaniam is a freelance writer who covers a wide array of investing topics, including retirement, FX trading, and small business.
Learn about our editorial policies
Updated May 28, 2022
Reviewed by
JeFreda R. Brown
Dr. Brown
Reviewed by JeFreda R. Brown
Full Bio
Dr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University.
Learn about our Financial Review Board
Fact checked by Kirsten Rohrs Schmitt

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 in March 2021 of a Russell 2000 company is $3.8 billion, and the average annual total return of the index over the past 10 years was 12.18%.

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. In March 2021, the average size of a company in this index is approximately $1.30 billion, and the index has produced an average total annual return of 11.71% 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.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. FTSE Russell. "Russell 2000 Index."

  2. MarketWatch. "S&P Small Cap 600 Index."

  3. Stock Market MBA. "What is the S&P SmallCap 600 Index?"

  4. S&P Dow Jones Indices. "S&P SmallCap 600."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description