The SPDR Russell Small Cap Completeness ETF (RSCO), the fund that until last week was the SPDR Dow Jones Mid Cap ETF (EMM) and was repurposed around a Russell benchmark, should deliver the same risk/return profile over time to investors who owned EMM before the makeover, but through a portfolio that’s certainly different from the original.
RSCO is a so-called completeness fund, and it will track the Russell Small Cap Completeness (SCC) Index, which measures the performance of Russell 3000 Index companies excluding S'P 500 constituents. In a general sense, that portfolio offers broader exposure than that which the previous index, the Dow Jones U.S. Mid-Cap Total Stock Market Index, provided.
The new fund will also have greater exposure to large-cap names, and to small/micro caps compared with EMM’s heavy focus on midcaps, an arbitrary shift in the portfolio exposure that investors who bought into EMM looking for midcap exposure should note.
In fact, RSCO’s new portfolio has only a 47.5 percent overlap in exposure with the old EMM portfolio, according to IndexUniverse ETF Analytics data.
“RSCO reaches further down the market-cap spectrum, and while the performance of the indexes underlying the two funds is not radically different based on historical long-term regressions, RSCO is still not a midcap fund,” IndexUniverse’s Paul Britt said. “It’s a much better proxy for the ’extended market’—mid and small caps.”
But State Street argues that the sector allocations and weighted-average market cap between RSCO and EMM are generally similar, and that the biggest differences between the funds are indeed on market-cap breakdowns—the Russell index offers greater exposure to small-caps relative to midcaps.
“While the Russell index has many more names than the Dow Jones, the risk/return characteristics and correlations of the two indices are similar over the long run,” a State Street representative told IndexUniverse.
“While some investors may wish to have pure exposure to midcaps, the precise, predictable and comprehensive exposure to small- to midcap exposure that RSCO offers should ultimately be viewed as a benefit,” the executive added.
In the end, what RSCO really sets out to do is to be a completeness fund, as the name suggests—or one that rounds out exposure to domestic stocks outside of the S'P 500 universe, with the goal of completing a large-cap investor’s U.S. equity market coverage with no gaps or overlaps.
“Investing in the combined S'P 500 and S'P 600 indexes results in gaps and overlaps in coverage,” the State Street executive said. “The Russell SCC Index fills in gaps in large-cap coverage by including all large-cap companies in the Russell 1000 not included in the S'P 500, and also comprehensively covers the entire small-cap market to complete coverage of the entire U.S. market.”
“In today’s market, having the ability to modular-create exposures, especially for investors with policy benchmark constraints, is especially important,” he added.
The concept isn’t necessarily new. In fact, RSCO would face a Vanguard fund that sets out to “complete” domestic equity exposure through an S'P benchmark.
The Vanguard Extended Market ETF (VXF) focuses on small and midsize companies except those in the S'P 500 Index. Tracking the S'P Completion Index, VXF owns about 3,100 small and midcap securities, with financials representing 23 percent of the overall portfolio—RSCO allocates about 23 percent to financials in a portfolio comprising some 2,500 names.
It’s worth pointing out that Vanguard’s approach to completeness is all based on S'P indexes, while RSCO goes about completing S'P 500 exposure through a Russell index rather than other S'P benchmarks, Britt noted.
“Completeness portfolios are rather specialized, but make sense in some contexts,” Britt said. “Imagine you’re a new advisor to a client with a long-standing large position in an S'P 500 fund, but no other U.S. equity exposure.
“To get broader exposure, the client could either sell the S'P 500 fund, with possible tax consequences, and buy a total market fund, or they could add a portfolio that complements the existing exposure,” he said.
RSCO has $108.4 million in assets, and has an annual expense ratio of 0.10 percent, or less than half the 0.25 percent EMM had, and just below the 0.14 ratio for Vanguard’s VXF.
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