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S&P 600 - how to invest in (not too) "small" companies from the USA [Guide]
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S&P 600 - how to invest in (not too) "small" companies from the USA [Guide]

created Forex ClubApril 22 2021

S&P 600 indexcontrary to appearances, it is not an extension of the most popular American index as it is S & P 500. The S&P 600 groups together six hundred American companies that are included in the small-cap category (small companies). The index was created by S&P Dow Jones Indices (SPDJI), which belongs to S&P Global (ticker: SPGI). The S&P 600 is therefore a benchmark for funds investing in small companies.

Due to its "breadth", the index is a measure of the general condition of the segment of small companies on the American stock exchange. For investors who only invest in small cap companies, the goal is to compare their investment performance to either the S&P 600 index or the Russell 2000 index.

History and characteristics of the S&P 600 index

The index was established in October 1994. The S&P 600 reflects the market condition of small-sized companies, which can be called the "vestibule" to S & P 400. Companies from the index mentioned above are also included in the "Broader indexes". You can list here S & P 1000, which is a collection of small (S&P 600) and medium-sized (S&P 400) companies. S&P 600 companies are also included in the S&P 1500 index, which groups small and medium-sized companies and the S&P 500 index.

In order for a company to be included in the S&P 600 index, it must meet a number of requirements. The company's capitalization must be between $ 750 million and $ 3,3 billion. It has to be an American company, therefore the index cannot include e.g. Chinese companies listed via ADS. However, they may be included in the index REITs. IWF indicator (investable weight factor) must be min. 0,1. The obligation to achieve is also an important condition positive financial result in the last quarter and during the last 4 quarters. Due to the latter requirement, many investors regard the S&P 600 as a more restrictive version of Russell 2000.

Market capitalization

According to the SPDJI at the end of March 2021 the index capitalization was $ 1 billion. This gives an average valuation of the company included in the index of $ 1,83 billion. However, the capitalization spread is very large and ranges from $ 203 million to $ 12,4 billion.

The S&P 600 is a highly diversified index that covers a large number of economic sectors. The index consists of "small" American enterprises which, in most cases, focus their activities on the domestic market. It is not surprising then that they are more sensitive to changes in the macroeconomic environment in the US economy. Completely different than in the case of large multinationals, which are listed in the S&P 500 index.

Like many indices relating to the US market, the S&P 600 is based on "Free-float capitalization". This means that the components of the US index are derived from market capitalization multiplied by the proportion of free float shares. Reclassification of the S&P 600 index occurs quarterly.

It is also worth knowing that the S&P 600 index also has its "value" and "growth" versions. Below is a summary of the average annual rates of return for each type of index:

Indices 5-year CAGR% 10 year old CAGR
S & P 600 13,75% 11,83%
S&P 600 Growth 15,41% 12,84%
S&P 600 Value 11,81% 10,68%

source: own study based on spglobal.com

S&P 600 Futures

As investors / speculators, you can also trade with the S&P 600 index futures. The value of one index point is $ 100. With the current index value (1 333 points), this gives the value the face of the futures contract at $ 133.

Contrary to the index Russell 2000 there are no micro e-mini contractsthat would be 1/10 of the e-mini contract. It is also worth mentioning that the index futures contract is not very liquid. Transactions are rarely concluded there. For this reason, a better option is to use a Russell 2000 futures contract.

Options on the S&P 600

It is also possible option trading on the S&P 600 index. The contract size is the same as the futures contract. The options have an American style of execution. There is a wide variety of options available on the market. From quarterly (March, June, September, December), where options are always available for the next four quarters, monthly. Like futures contracts, options are not among the most popular traded instruments.

Index composition

According to data provided by S&P Dow Jones Indices, the S&P 600 index has 601 components. At the end of March 2021, the dividend yield of this index was 1,16%. In turn, the median value of companies included in the index was $ 1,541 billion. The top 10 S&P 600 companies have a combined weight of 5,7% of the entire index.

The index is very well diversified in terms of sectors of the economy. The largest shares are held by companies from the following industries:

  • industry - 18,0%,
  • finance - 17,4%,
  • discretionary goods - 16,1%,
  • IT - 13,4%,
  • Healthcare - 11,4%,

The largest components of the index are the following companies:

  • GameStop.,
  • Saia Inc.,
  • NeoGenomics Inc.,
  • Omnicell Inc.,
  • Crocs Inc ..

Examples of S&P 600 index components

Below is a brief overview of several companies included in the S&P 600 index.

American States Water Co

American States Water was founded in 1929. At the end of 2020, the company supplied water to approximately 262 customers in 000 California counties. At the same time, American States Water distributes electricity to 10 thousand. clients in San Bernardino County. Therefore, the company operates on a regulated market. AWR has been a dividend payout company since 24,5, and has been steadily increasing the dividend level since 1931. So it is not surprising that it is classified as a dividend aristocrat. The company's capitalization is less than $ 1954 billion.

$ Million 2017 2018 2019 2020
revenues 440,6 436,8 473,9 488,2
Operational profit 118,8 100,9 126,8 130,5
Operating margin 26,96% 23,10% 26,76% 26,73%
Net profit 69,0 635 83,9 86,1

Source: own study

alarm.com

The company offers solutions in the field of intelligent protection of flats and houses in the United States and on selected foreign markets. The solutions include smart locks, motion sensors, property monitoring, intelligent thermostats and video monitoring services (reducing the number of false signals). The services also include the service of sending fragments of monitoring recordings to the phone or e-mail. Alarm.com's solutions are sold to customers through a network of partners. The company's capitalization is less than $ 4,4 billion.

$ Million 2017 2018 2019 2020
revenues 338,9 420,5 502,4 618,0
Operational profit 33,3 12,2 50,4 56,3
Operating margin 9,82% 2,90% 10,03% 9,11%
Net profit 29,2 21,5 55,5 77,9

Source: own study

Forrester Research

It is one of the most famous independent analytical companies in the world. The services offered by Forrester include, among others, research (e.g. individual markets), consulting or organization of industry meetings (e.g. Technology & Information APAC). About 2700 customers use the company's services. In 2020, the highest revenue was generated by the research segment ($ 295 million), the second important branch is consulting ($ 144 million in 2020). The company's capitalization exceeds $ 827 million.

$ Million 2017 2018 2019 2020
revenues 337,7 357,6 461,7 449,0
Operational profit 27,5 26,2 7,9 21,9
Operating margin 8,14% 7,33% 1,71% 4,88%
Net profit 15,1 15,4 -9,6 10,0

Source: own study

Crocs

The company is best known for its controversial footwear - crocs. Some people love them, others hate them. Crocs offers footwear for both adults and children. The company's offer includes clogs and sandals. Crocs also offers personalization of its products. Since its inception in 2002, the company has sold over 720 million pairs of shoes in over 90 countries around the world. The company's capitalization exceeds $ 5 billion.

$ Million 2017 2018 2019 2020
revenues 1 023,5 1 088,2 1 230,6 1 385,9
Operational profit 22,6 65,1 128,6 235,2
Operating margin 2,21% 5,98% 10,45% 16,97%
Net profit -5,3 -69,2 119,5 312,9

Source: own study

J&J Snack Foods Corp.

The company was established in 1971. It is an American producer of niche snacks and iced drinks. The products include soft pretzels, burritos and churros. The company sells its products on the American, Canadian and Mexican markets. The company's brands include Icee, Hill & Valley and SuperPretzel. The company's capitalization exceeds $ 3 billion.

$ Million 2017 2018 2019 2020
revenues 1 084,2 1 138,3 1 186,5 1 022,0
Operational profit 118,1 110,8 116,9 23,6
Operating margin 10,89% 9,73% 9,85% 2,31%
Net profit 79,2 103,6 94,8 18,3

Source: own study

La Z Boy Inc

The company was founded in 1927. It is an American furniture manufacturer based in Monroe, Michigan. They also sell their products in the network of their own stores. They operate on the American and Canadian markets and sell their products both through a stationary sales network and using the e-commerce channel. The company's capitalization exceeds $ 1,9 billion.

$ Million 2017 2018 2019 2020
revenues 1 520,1 1 583,9 1 745,4 1 703,9
Operational profit 130,6 129,4 129,7 145,6
Operating margin 8,59% 8,17% 7,43% 8,54%
Net profit 85,5 80,4 68,4 77,4

Source: own study

Skirt

The company operates in the LTL (less-than-truckload) segment, the size of which is estimated at around $ 40 billion per year (in the US). The company offers shipments of 100 to 10 pounds in weight. At the end of 000, Saia had approximately 2020 tractors and 5700 trailers. The company's capitalization exceeds $ 17 billion.

$ Million 2017 2018 2019 2020
revenues 1 378,5 1 653,8 1 786,7 1 822,4
Operational profit 131,9 179,6 195,7 230,1
Operating margin 9,57% 10,86% 10,95% 12,62%
Net profit 91,2 104,9 113,7 138,3

Source: own study

What could affect the S&P 600?

The condition of the American and world economy

The index includes both companies operating mainly on the American market (Alarm.com, Shake Shack) and international corporations whose products are sold mainly on foreign markets (WD-40, Crocs). For this reason, the index is influenced by both the condition of the world economy and the condition of the national economy.

Financial results of companies

In the long term, the company's improving financial results are the most important. Increasing revenues, profits, and free cash flow (FCF) are solid arguments for long-term increases in stock prices. For this reason, it is worth following the financial results of companies included in the index. Especially those that have the greatest impact on changing the index value.

How to trade the S&P 600 Index?

One of the easiest ways to invest in the S&P 600 Index is acquisition ETFs with exposure to this index. Of course, you can also use futures on this index, but they are not very liquid. For this reason, it is better to use ETFs. This solution is especially recommended for long-term investors who want to save on management fees of funds investing in the small company segment.

The most popular ETF that gives exposure to companies on the S&P 600 index is iShares Core S&P Small - Cap ETF. As of April 19, 2021, the assets under management totaled $ 68,86 billion. TER (total expense ratio) is only 0,06%. The spread is on average 0,02%. The ETF consisted of 605 companies.

Another example of an ETF giving exposure to companies on the S&P 600 index is Vanguard S&P Small-Cap 600 ETF. As of April 19, 2021, the assets under management totaled $ 1,59 billion. TER (total expense ratio) is slightly more than in the case of the iShares product. TER is 0,10%. The spread is 0,12% on average. The ETF consisted of 604 companies.

ETF brokers

For example on XTB Today, we can find over 3500 equity instruments and 400 ETFs, a Saxo Bank over 19 companies and 000 ETF funds.

Broker xtb 2 saxo bank logo small Admirals
End Poland Denmark Great Britain / Cyprus
Number of exchanges on offer 16 exchanges 37 exchanges 16 exchanges
Number of shares in the offer approx. 3500 - shares
circa 2000 - CFDs on shares
19 - shares
8 - CFDs on shares
approx. 3 - CFD on shares
The amount of ETF on offer approx. 400 - ETF
approx. 170 - CFD on ETF
3000 - ETF
675 - CFD on ETF
approx. 360 - CFD on ETF
Commission
0% commission up to EUR 100 turnover / month according to the price list according to the price list
Min. Deposit PLN 0
(recommended min. PLN 2000 or USD 500, EUR)
PLN 0 / EUR 0 / USD 0 PLN 5
Platform xStation SaxoTrader Pro
Saxo Trader Go
MetaTrader 5
 

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.

This article is for information only. It is not a recommendation and is not intended to encourage anyone to undertake any investment activities. Remember that every investment is risky. Do not invest money you cannot afford to lose.
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Forex Club
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