It is tempting to include data comparing each of the indexes on a variety of financial metrics: price/earnings ratio, price/book ratio, dividend yield, etc. Unfortunately, the indexes are constructed in such a way that they don't allow for easy apples-to-apples comparisons.
The problem has to do with how the indexers sort stocks into various market capitalization categories: large cap vs. mid cap vs. small cap. Consider the chart below, which shows the percentage of the U.S. equity universe that each indexer includes in each major market capitalization categories.
Index Family |
Large Cap |
Mid Cap |
Small Cap |
|
Dow Jones Total Market |
73% |
19% |
8% |
|
Dow Jones/Wilshire |
87% |
No Index |
12% |
|
Morningstar |
70% |
20% |
7% |
|
MSCI |
72% |
15% |
12% |
|
Russell |
92% |
No Index |
8% |
|
S&P/Barra |
77% |
7% |
3% |
|
Wilshire |
79% |
9% |
10% |
|
*Note that the Intellidexes are excluded from this analysis, because they do not aim to recreate the entire equity universe. |
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Within the large cap sector, indexers include between 70 and 92 percent of the total U.S. market - a 22 percent swing!
The difficulty in using comparison data arrives because the market values large companies differently from small companies. As a result, one index may have a higher average price/earnings ratio than another because of its selection methodology, or because it has more large cap names … it's hard to isolate the impact.
With that in mind, however, consider the chart below, which compares data from the eight major U.S. small cap value indexes as of March 31, 2005
|
Small Cap Value Index Comparison |
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|
Index Family |
Price/Book Ratio |
2004 Return |
|
Dow Jones Total Market |
2 |
18.37% |
|
Dow Jones/Wilshire |
2 |
19.61% |
|
Intellidex |
3 |
36.22% |
|
Morningstar |
2.2 |
24.03% |
|
MSCI |
2 |
23.70% |
|
Russell |
1.8 |
22.25% |
|
S&P/Barra |
1.7 |
21.83% |
|
Wilshire |
1.6 |
19.62% |
Two things jump out from the data.
First, methodology clearly plays a key role in determing the index-level statistics. The two indexers who put the greatest emphasis on book value in their methodology (S&P/Barra and Wilshire) have the two lowest price/book ratios in this important value category. Similar results follow for other capitalization categories.
Second, there is a huge variability in the returns. In 2004, the worst performing small cap value index - the Dow Jones Total Market index - returned just 18.37 percent. In comparison, the best-performing index - the "enhanced" Intellidex index - returned 36.22 percent, almost twice as much. Even within the traditional indexes, there was a huge deviation in return, with the 24.03% return on the Morningstar index outpacing the Dow Jones product by almost six percent.
