We recently covered several different topics, from what makes a company American to how many of its outstanding shares could actually be owned by index trackers if they were included in a major U.S. index. We have covered the topic of indexing.
This week, we’ll look at the characteristics of large-cap, mid-cap, and small-cap companies. The short answer is that it mainly depends on each index provider’s size definition.
Cutoff changes all the time
Each index provider seems to think differently when defining size categories. for example:
- S&P refers to the S&P 500 as the large-cap index and the S&P 400 as the mid-cap index.
- In contrast, the Russell 1000 is commonly referred to as a large-cap index, even though it has more companies than the S&P 500 and S&P 400 combined.
Additionally, due to index inclusion rules, not all stocks are eligible for all index families.
And even if you do an annual “reset” like Mr. Russell does, stock prices will fluctuate over time, with some companies growing in size and others shrinking.
In fact, when we look at the market capitalization of companies in all major U.S. indexes, we see significant overlap, both within index families and across market capitalization cutoffs, as Figure 1 shows.
Exhibit 1: Stocks included in major U.S. indexes by market capitalization category
The data in Graph 1 shows how different indexes perform.
- Minimum size for index addition: Pink lines are the most visible recent public “Auto addition” Market capitalization cutoff level. We now see that all indexes include companies well below these additional levels (although most indexes suffer from unnecessary index rotation as companies drop out and return to the index). “buffer zones” are also allowed to reduce the rate).
- Many microcap stocks are not included in major indexes. The market capitalization of all companies in the U.S. market (gray) is significantly less than the smallest stock in the Russell 2000 Small Cap Index.
- Each provider has a different “size” cutoff. The median market capitalization of the Russell 2000 Small Cap Index (the intersection of the gray boxes) is approximately the same size as the “additional level” of the S&P 600 Small Cap Index.
- There are still duplicates in the index family. Almost half of the stocks in the S&P 400 are larger than the smallest stock in the large-cap S&P 500 index. The same is true for the S&P 600 small-cap index and the large-cap S&P 400 index.
- Buffer zones are used to minimize turnover. Despite the Russell Reconstitution resetting the size index in June 2024, there is a “buffer zone” intended to reduce unnecessary switching between indexes for stocks close to the cutoff.
- Not all stocks are included in all indexes. The Nasdaq-100® Index and the Nasdaq Next Generation 100™ Index include just 200 companies combined. However, the smallest company in the Nasdaq Next Generation 100™ Index is approximately the same size as the smallest company in the S&P 500.
So what exactly is the cutoff?
The dot plot above is ideal for comparing component-level information and the distribution of market capitalization for each index and index family using current prices.
However, it may be helpful to know the exact cutoff and market capitalization characteristics of each index. Listed in Table 1 based on September 2024 prices.
Table 1: Key statistics of the market capitalization index (as of September 2024)
What would happen if you could completely break through the market?
What if we could create our own buckets based on all U.S.-listed companies (gray dots in Chart 1) with 1,000 companies in each size group and no buffer zone?As Figure 2 shows , there are five market capitalization groups, but the Nanocap group currently has over 1,000 stocks.
- The largest cap bucket starts at about $7.3 billion.
- The mid-cap range is $1.7 billion to $7.2 billion.
- Small-cap stocks range from $450 million to $1.6 billion.
Graph 2: Equal count bucket and market cap cutoff
Of course, there may also be some debate about how market cap buckets are defined here.
Size depends on index provider
What this research shows is that the “size” category varies significantly depending on the index provider’s rules.
However, if you want a “general rule of thumb” and an easy-to-remember approximation that is index provider independent, the following cutoffs seem to work:
- Large-cap stocks exceed $10 billion.
- The mid-cap cap will drop from $10 billion to $2 billion (or maybe a little less).
- Small-cap stocks are worth less than $2 billion and can have a market capitalization of $200 million.
At least for now, at 2024 prices.
