DEFINITION of S&P 600
The S&P 600 is an index of small-cap stocks managed by Standard and Poor's. It tracks a broad range of small-sized companies that meet specific liquidity and stability requirements. This is determined by specific metrics such as public float, market capitalization, and financial viability among a few other factors. Market capitalization, for instance, must fall between $450 million and $2.1 billion to ensure individual assets do not overlap with the larger S&P 500 or mid-cap S&P 400 indexes.
BREAKING DOWN S&P 600
The S&P 600 is comparable to the Russell 2000 Index in that both measure the performance of small-cap stocks but the former covers a much narrower range of assets. For this reason, the S&P 600 only watches about 3-4% of total investable equities in the United States. As of October 2017, there were 601 stocks tracked in the index with an average market capitalization of about $1.36 billion. The top 10% of holdings dictate about 5.2% of all movement in the index. Some of the companies with the largest weighting in the index include Interactive Brokers (IKBR) and Stamps.com (STMP). A breakdown by sector shows a large portion of the listed companies operate in industrials, financials, and information technology. The fewest number of companies do business in telecommunications and consumer staples.
It's not possible to directly buy and sell an index, but several exchange-traded funds (ETF) exist for investors looking to trade the S&P 600. The most active ones flow through Blackrock's iShares (IJR), State Street's SPDR (SLY), and Vanguard (VIOO). One reason investors choose these funds is to capture the massive upside potential offered by small-cap stocks. The truth is that many of the more successful companies leave the benchmark when a spot opens up in one of the larger indexes. Other reasons to leave the index include a merger or delisting from the stock exchange.
Limitation of the S&P 600
Investing in small-sized companies may offer higher potential returns than large-cap stocks, but it also presents several challenges. Many of the companies listed on the S&P 600 maintain small geographic footprints and tend to suffer when the dollar weakens. In theory, this provides an incentive to trade overseas rather than to buy from a small, domestically owned business. A hit to earnings growth would likely also take a toll on the stock price. Moreover, many small companies have lower levels of liquidity and higher volatility than a large cap, meaning they tend to fluctuate more erratically.