• The Standard & Poor's 500 Index (S&P 500). Comprised of 500 of the largest companies from all the major sectors of the economy, this index has long been used by investing pros as the benchmark of their performance. Many people treat the S&P 500 as the gold standard of indexes. With coverage of roughly 80% of the stock market's value, it's a very good gauge of large company stock performance, but doesn't really cover the entire market. As we saw with the Wilshire 5000 and Russell 3000, they are better choices for doing that.
• Russell 1000. This index is composed of the 1,000 largest companies found in the Russell 3000, and represents roughly 92% of the market. This index includes most of the medium-sized companies that Standard & Poor's breaks out into a separate index.
Medium-Sized Company Indexes
It's good to recognize that these medium-sized stocks, and the funds that track them, often behave differently than their giant siblings.
• Standard & Poor's MidCap 400. Mid-caps are recognized as often behaving differently as a group than either large companies or smaller ones. As a result, Standard & Poor's created an index just for them. Although the index contains 400 stocks, it represents only about 7% of the market's overall value due to the step down in size.
Small Company Indexes
It's worth noting that these indexes really fall into two distinct groups: the pure small-cap indexes and what you might call the "small-caps plus" indexes. All four listed indexes contain a numerical majority of small company stocks. However, the Wilshire 4500 includes a significant number of medium sized companies, and the Nasdaq includes some medium and even large companies. As a result, the Wilshire 4500 and Nasdaq Composite are less of a pure reflection of small company performance than are the S&P 600 and Russell 2000. For our purposes though, a fund based on any of the below indexes is appropriate to fill the small-company slot of your portfolio.
• Wilshire 4500. This index isn't quoted very often, but it's importance comes from the fact that some of the high profile small-company index funds use it as their target. This index includes all of the remaining Wilshire 5000 stocks after those in the S&P 500 are removed. As a result many medium-sized stocks are included here, giving this index a larger average stock size (worth an average of $1.6 billion) than the other small-company indexes.
• Nasdaq Composite. Originally started as a place to trade small over-the-counter stocks, the Nasdaq still reflects the fortunes of the roughly 3,500 category 3 and 4 stocks that comprise it, at least to some degree. However, over the past ten years, the Nasdaq has become synonymous with technology stocks due to the emergence of Nasdaq giants like Microsoft, Intel, and Cisco. As a result, it's less helpful as a benchmark of true small-company stock performance.
• Standard and Poor's SmallCap 600. Despite covering only about 3% of the U.S. stock market by value, this index is used by a number of funds as a benchmark for small stocks due to the well-known Standard & Poor's brand.
• Russell 2000. The remaining 2,000 companies in the Russell 3000 end up here. At this point, this index is generally accepted as the best measure of pure small-company stock performance. Like the S&P SmallCap 600 index, the average company included here is worth slightly less than $500 million, just one-third the size of the average Wilshire 4500 stock.
