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The Russell 2000 Index debuted in 1984 and while that’s young relative to the Dow Jones Industrial Average and the S&P 500, it is old in terms of small-cap gauges. As such, the Russell 2000 is one of the most widely observed small-cap indexes in the world.
A byproduct of that status is that hundreds of active and passive funds track the Russell 2000 and its offshoots, including growth and value. None of those superlatives should imply that the Russell 2000 is “perfect.” No index is and that much is confirmed in the world of large-caps where some gauges are increasingly concentrated in a small number of stocks, betraying their reputations for diversification.
Still, one of the nifty things about pure beta indexes such as the small-cap Russell is that their often straight-forward approach lends itself to tinkering and creative alterations. Such ingenuity can be found with the newly minted Global X Russell 2000 ETF (RSSL).
RSSL, which debuted earlier this month, follows the Russell 2000 RIC Capped Index. We’ll explore how that index separates RSSL from its basic, established Russell 2000-tracking counterparts.
Exploring RSSL Differentiating Factors
For the uninitiated, in this case RIC means registered investment company. That is to say RSSL’s underlying index should behave in fashion highly similar to the standard Russell 2000, but there are some important differences to note.
First, RSSL’s index mandates that no individual stock can exceed a weight of 20%. It’d be rare to see that scenario play out in a broad-based small-cap index, but it’s a good failsafe to have. Likewise, the aggregate weight of all components in the RIC index with allocations of 4.5% or more cannot exceed 48% of the total benchmark. Those stipulations are not found with the old guard Russell 2000.
The good news for advisors wondering if RSSL’s mandates could lead to money being left on the small-cap table, the answer is likely “no” because the RIC index will likely prove to be highly correlated to its traditional counterpart.
“By maintaining the capping methodology employed by the RIC Capped Index, an investor might be less dependent upon the performance of any individual company and maintain the measure of diversification that is meant to be provided by an interest in a broad 2000 stock constituency,” according to Global X research. “Even so, investors would still have the opportunity to participate in the price appreciation of a specific stock, up until it grows to represent 20% of the value of the index at the next rebalance.”
RSSL Has Fee Feather in its Cap
In many regards, RSSL isn’t much different than standard Russell 2000-tracking ETFs. However, it has an another avenue for setting itself apart from the competition: a low fee.
RSSL’s annual expense ratio is 0.08%, or $8 on a $10,000 investment. That means just nine small-cap ETFs are less expensive by that metric and the Global X offering has the lowest fee of any ETF tracking the Russell 2000.
When factoring funds that follow the Russell 2000 that aren’t ETFs, the average expense ratio swells to 0.93%, indicating RSSL could be a compelling alternative to those products.
“This is a credit to the fund’s passive management style, the expectation that it will trade its underlying constituency infrequently, and its intent to track the underlying Russell through its representative sampling strategy,” concludes Global X.