We find persistent performance disparities when comparing three leading benchmarks for US small cap equity, with the MSCI US Small Cap 1750 and the S&P Small Cap 600 outperforming the Russell 2000. Analysis suggests that differences in benchmark construction are the drivers of these disparities. When compared to the Russell, arguably the “purest” of the small cap benchmarks, the MSCI tilts into the midcap range, while the S&P only includes issues with recent positive earnings, introducing a quality screen.
As the Russell is the most representative of the US small cap equity space, it should remain the “default” benchmark, unless investors believe that their small cap manager will tilt toward quality, in which case the S&P provides a better fitting benchmark that historically has also imposed a higher hurdle for active managers to beat. Finally, because we expect that a quality-biased index should outperform an index lacking such a tilt, we would recommend passive investors utilize a product tracking the S&P.