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ETF Specialist

The Most Popular Small-Cap Index Isn’t the Best

Small-cap index investing works, just don't do it with the Russell 2000.

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Conventional wisdom holds that the small-cap stock arena is a more-fertile hunting ground for active managers than large-cap stocks, as smaller firms tend to be less widely followed, which makes them more likely to be mispriced. That may be true, but as the most recent installment of Morningstar’s Active/Passive Barometer shows, most active managers still have a hard time beating their index counterparts.

Not all small-cap indexes are created equal. The popular Russell 2000 Index has consistently lagged other broad market-cap-weighted small-cap indexes. It isn’t a bad starting point, but there are better alternatives. Here’s a closer look at iShares Russell 2000 ETF IWM, which tracks this benchmark. This is a fine offering with a durable cost advantage against its actively managed peers, underpinning its Morningstar Analyst Rating of Bronze.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.