Mike Rawson: IShares Russell 2000 ETF (IWM) is, by far, the most popular small-cap ETF, but it tracks an index that has underperformed every other major small-cap index.
The Russell 2000 Index of small-cap companies may be a victim of its own success. More assets are benchmarked to that index than any other small-cap index. This could cause stocks going into the index to underperform as arbitragers buy these stocks in anticipation of index changes. Compared with the S&P Small Cap 600 Index, the Russell 2000 uses more mechanical index-construction rules. This allows in more low-quality firms, such as firms with negative retained earnings.
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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.