Russell Small Cap Completeness Index

What Is the Russell Small Cap Completeness Index?

The Russell Small Cap Completeness Index is a market-capitalization-weighted index comprised of Russell 3000 stocks that are not included in the Standard & Poor's 500 Index. Constructing it in this way provides investors with a broad basket of small- and mid-cap assets that are uncorrelated to widely owned stocks like Apple (AAPL) and Amazon (AMZN). Each year, FTSE Russell reconstitutes the index to remove companies recently eligible for the S&P 500. This ensures the index remains uncorrelated to the broader market and helps minimize losses in the event of a downturn.

How the Russell Small Cap Completeness Index Works

The Russell Small Cap Completeness Index ranges in size; the largest company holds a market cap of about $104 billion while the average company stands at $1.3 billion. A significant portion of the holdings operate in financial services, consumer discretionary, and technology sectors. And unlike most other indexes, a large portion of price movement is determined by each sector. In fact, some of the top holdings include Uber (UBER), Square (SQ), and Spotify (SPOT), each of which does business outside of the tech sector.

Adding the Russell Small Cap Completeness Index to a portfolio typically requires purchasing an exchange-traded fund (ETF). As of December 2020, the index outperformed the Russell 3000 over one-, three-, and five-year time frames. Year-to-date shares are at about 5%, exceeding the benchmark index by nearly 4%.

Advantages of the Russell Small Cap Completeness Index

The benefits of investing in assets uncorrelated to the broader market can't go understated. It offers investors more diversification and a means to protect against downside risk. Constructing a portfolio with uncorrelated assets also allows the movement of one asset to partially offset a decline in another, thereby reducing the average volatility of a portfolio. This is a fundamental method to reduce large variations between companies, otherwise known as unsystematic or diversification risk. Sometimes buying uncorrelated assets doesn't result in a winning situation. In the event of a systemic crisis, comparable with the recent recession, most assets are exposed to a large amount of volatility. 

Another advantage of this approach includes an opportunity to capture returns from outperforming assets and reinvest the profits in the underperformers. The Russell Small Cap Completeness Index and other assets like it serve as a reminder that uncorrelated returns can protect a portfolio when large-cap stocks tumble.