The S&P Rides Its Winners and Cuts Its Losers… the Russell Does the Exact Opposite
Not all equity indices are built the same.
This is one of the most important and least understood differences between these indices:
The S&P 500 holds its winners and cuts its losers.
The Russell 2000 holds its losers and cuts its winners.
The S&P 500: A “Survival of the Fittest” Index
The S&P 500 is one of the most famous stock market indexes in the world. It’s a basket of 500 of the largest companies in the world.
But this basket of 500 stocks is always changing. Underperformers are removed if they fail criteria, for example, if they stop being profitable for long periods or they experience a shrinking market cap. This profitability mandate screens out losers upfront, and they are replaced with stronger companies.
Basically, the index constantly sheds dead weight and incorporates rising stars.
This is why SPX trends so cleanly over decades.
ETF Equivalent for Traders (If You Don’t Use ES Futures)
If you don’t trade ES (S&P 500 futures), the SPY ETF gives you perfect exposure:
SPY — Most liquid ETF on Earth
The Russell 2000: A “Winners Graduate, Losers Stay Forever” Index
Now compare that to the Russell 2000.
Its methodology keeps small caps inside the index… until they either grow too large or shrink too slowly.
This creates the opposite effect of the S&P:
Winners graduate out of the index (they leave once successful)
Losers remain (often until dilution, distress, or bankruptcy)
This is why the Russell 2000 structurally struggles and why small caps have long periods of stagnation.
ETF Equivalents for Traders (If You Don’t Use RTY Futures)
If you don’t trade RTY (Russell 2000 futures), the IWM ETF is your vehicle:
IWM — The primary small-cap ETF (massive options volume)
The S&P 500 (SPY) completely outclasses the Russell 2000 (IWM)
Next time you’re tempted to allocate part of your portfolio to IWM, keep in mind that SPY inherently:
Boosts weightings for companies that expand and thrive
Increases exposure to companies that grow
Decreases exposure to companies that shrink
Removes failures entirely
This is the closest thing to a self-optimizing portfolio that exists.