In an attempt to control for the July reconstitution effect, a hypothetical index was created where the monthly returns are represented by the Russell 2000, with the exception of July being represented by the S&P SmallCap 600. From 1994 through 2014, the difference in an investment of USD 1.00 into each the Russell 2000 and the S&P SmallCap 600 amounts to USD 2.41 (USD 6.18 and USD 8.59 respectively). The same investment in the hypothetical index results in USD 7.17, USD 1.42 lower than the S&P SmallCap 600. Therefore, only a portion of the excess returns may be attributed to the July reconstitution effect, with the rest of the difference coming from other factors.
This article was written by Phillip Brzenk, associate director, index research and design, S&P Dow Jones Indices.
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