By Paul R. La Monica
Small-cap stocks have had a rough start to 2024, missing out on this broader market's rally. But the Russell 2000's poor return would be even worse if not for the stellar performance of two tech stocks that no longer qualify for inclusion.
The artificial-intelligence darling Super Micro Computer and the software firm MicroStrategy, which is basically a proxy for Bitcoin given the tens of billions worth of the cryptocurrency it has on its balance sheet, are both soaring this year. Super Micro was up more than 220% and MicroStrategy had gained nearly 80% through Wednesday.
Those two companies had added about 1.42% to the return of the Russell 2000 , according to FTSE Russell. The index was down about 4% this year as of Wednesday, so it would have been off nearly 5.5% if it didn't have Super Micro and MicroStrategy in it.
That would be closer to the performance of another key small cap benchmark, the S&P Small Cap 600. That index, which includes neither stock, was down about 6% this year as of Wednesday.
That shows that just as the S&P 500 is dominated by the Magnificent Seven tech stocks, the "Russell 2000 has its own unique/oddball tech exposure," Jessica Rabe, co-founder of DataTrek Research, said in an emailed newsletter.
"You would think that, with just about 2000 stocks...the Russell would be immune from the sort of concentration we've just seen in the S&P 500," Rabe wrote. Perhaps the Russell 2000 "needs a few more meme-ish stocks, not fewer, if it is to start generating better returns," she joked.
But investors in small-caps will probably have to get used to not having Super Micro or Microstrategy in the Russell 2000. The index will soon undergo its annual reconstitution, and neither company is likely to be included.
Super Micro had a market cap of $43 billion as of Friday, making it so large that it was even added to the S&P 500 this year. MicroStrategy has graduated to large-cap status too, with a market valuation of $21 billion.
These two tech companies aren't the only large-caps formerly known as small-caps that are having outsize impacts on the index. HVAC company Comfort Systems, makeup seller e.l.f. Beauty, gaming equipment maker Light & Wonder, and used car retailer Carvana now have some of the top weightings in the Russell 2000 thanks to gains this year.
FTSE Russell will announce preliminary additions and deletions to the Russell 2000 in late May, based on a ranking of companies' market caps as of the end of this month. The changes will be made final in early June, allowing trading in the revised Russell 2000 to begin on July 1.
That window from late May to the beginning of July means that other companies added to the index could wind up quickly graduating from small cap to mid cap or even large-cap status if investors scoop up the shares between the preliminary index inclusion announcement and finalization of the updates.
"Between reconstitution dates, stocks can remain in an index even when they no longer meet its parameters," said Karen Umland, senior investment director and vice president with Dimensional Fund Advisors in a recent report.
"Super Micro Computer is not an isolated example," she said. "The exposure to these larger cap stocks tends to increase each year between the June reconstitution dates."
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 22, 2024 08:06 ET (12:06 GMT)
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