An Underappreciated Asset Class: A Case for SMID Cap Growth

James Hasso

James Hasso

Head of Small Cap and Portfolio Manager

As small-cap capacity continues to decline, where can investors go to find small-cap exposure? The Russell 2500 Growth benchmark, representing the SMID cap growth asset class, can provide investors with a small-cap like return profile with the added beneficial exposure to more mature companies that have grown over time. Let’s break down these two benchmarks for a better understanding of this underappreciated asset class.

With the Russell 3000 Index as their foundation, the Russell 2000 Growth (“small-cap growth”) and Russell 2500 Growth (“SMID-cap growth”) indices measure the smallest U.S. companies as defined by market capitalization and Russell’s “growth” style classification. The primary difference in their composition is the number of companies that comprise them. The Russell 2000 Growth Index contains approximately 2,000 of the smallest U.S. growth companies with market caps that range from $21 million to $11 billion. The Russell 2500 Growth contains all of the same companies as the Russell 2000 Growth Index plus 500 of the next largest companies, extending the market cap up to $22 billion. And, as companies included in the Russell 2000 Growth Index grow over time, they will graduate into the Russell 2500 Growth Index as part of Russell’s annual rebalance.

As a result of these shared characteristics, the historical returns of the Russell 2500 Growth Index and the Russell 2000 Growth Index are highly correlated (noted below). Not only has the Russell 2500 Growth Index generated small-cap like returns, it has done so with less risk and greater liquidity. It’s an underappreciated sweet spot and a natural extension of any small-cap growth strategy.

In closing, for investors running up against capacity constraints in small-cap, the SMID-cap growth universe may provide the best of both worlds: exposure across market caps with the potential for greater returns with less risk and more liquidity.

The Sweet Spot: SMID-Cap Growth Has Delivered Small-Cap Growth-Like Returns with Less Risk
The Sweet Spot: SMID-Cap Growth Has Delivered Small-Cap Growth-Like Returns with Less Risk

Source: Morningstar. The data in the line graph above is based upon cumulative returns. The data in the table above is based upon annualized returns. Investors cannot invest directly in an index. The Russell 2500 Growth Index includes the small to mid-capitalization segment within the float-adjusted, market capitalization weighted Russell 3000 Index. The Russell 2000 Growth Index includes the small capitalization segment within the float-adjusted, market capitalization weighted Russell 3000 Index.

Past performance does not guarantee future results.

All data is as of December 31, 2016. This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.