Daniel Belanger
Small-cap equities have long played a central role in portfolios seeking growth potential and diversification. For small-cap investors looking to emphasize profitability and operational strength, FTSE Russell has developed the Russell 2000® Earnings Leaders index.
The index applies transparent, rules-based criteria to identify companies within the Russell 2000 universe that demonstrate positive earnings and sustained improvement in key profitability metrics. The Russell 2000 index, launched in 1984, is the original benchmark for US small-cap stocks, providing a consistent and comprehensive view of the performance of the small company segment.
In this FTSE Russell Insight, we discuss why current market conditions have sharpened investor interest in earnings-focused approaches, outline the methodology behind the Russell 2000 Earnings Leaders Index and review the index’s back-tested characteristics.
Seeking quality in a changing market
Recent market conditions have reinforced investor attention on earnings durability, balance sheet strength and operational efficiency. Persistent inflation has continued to pressure profit margins, while interest rates remain structurally higher than in the prior decade, increasing the cost of capital and elevating the importance of cash flow generation. At the same time, we may be in the later stages of the US credit cycle, highlighting the role of financial resilience amid more selective funding environments.
These dynamics have led some small-cap investors to seek systematic approaches that emphasize profitability and improving fundamentals.
A rules-based approach to identifying earnings leadership
The Russell 2000 Earnings Leaders Index applies a transparent, rules-based methodology, designed to identify companies within the Russell 2000 universe that exhibit positive earnings and sustained improvement in key profitability measures (Figure 1).
Constituent eligibility is assessed using clearly defined financial metrics derived from company-reported data. These include positive earnings or funds from operations, depending on industry, alongside multi-year improvements in measures such as return on equity and net profit margins, where applicable. To support durability, the methodology requires positive starting values and evaluates improvement over a three-year lookback period, helping to reduce sensitivity to short-term fluctuations.
The index is market-capitalization weighted, with index-level constraints applied to support diversification and regulatory requirements while maintaining representation of the selected company characteristics.
Figure 1. Russell 2000 Earnings Leaders Index Construction Methodology
| Screening Methodology | |||
| Screen Type | Threshold | Applicable Industries | Additional Notes |
| Return on Equity | Difference from prior 3-years value must be >= 1% | All | Starting Value (3-years prior) must be greater than zero. Metric is comprised of last 12 months of data. |
| Net Profit Margin | Difference from prior 3-years value must be >= 1% | Excludes Financials, Real Estate | Starting Value (3-years prior) must be greater than zero. Metric is comprised of last 12 months of data. |
| Earnings Values | Last 12-months of earnings must be greater than zero. | Financials | Not applicable |
| Funds from Operations Values (FFO) | Last 12-months of FFO must be greater than zero. | Real Estate | Not applicable |
Note: If FFO is not available for a Real Estate firm, we then look at its Earning Value to determine inclusion in the index.
Russell 2000 Earnings Leaders Index characteristics
Over the back-tested period of January 2008 to September 2025, the Russell 2000 Earnings Leaders Index exhibited a distinct mix of return and risk characteristics relative to the Russell 2000 Index (Figure 2).
The Russell 2000 Earnings Leaders Index delivered differentiated performance across market cycles, with periods of meaningful upside participation alongside episodes of lower drawdown sensitivity. These patterns reflect how an emphasis on profitability and balance-sheet metrics has historically interacted with changing market environments, particularly during higher-rate regimes.
Figure 2. Russell 2000 Earnings Leaders Index Risk and Return Statistics, January 2008 – September 2025
| Performance Statistics | ||
| Russell 2000 Earnings Leaders Index | Russell 2000 Index | |
| Annualised Return | 10.54% | 8.22% |
| Annualised Volatility | 24.32% | 25.59% |
| Risk Adj Return | 0.43 | 0.32 |
| Sortino Ratio | 0.62 | 0.45 |
| Max Drawdown | -50.64% | -54.43% |
| Tracking Error | 5.12% | |
| Information Ratio | 0.45 | |
| Annualised Alpha | 2.60% | |
| Beta | 0.93 | |
| Downside Capture | 90.72 | |
| Upside Capture | 92.66 | |
Source: FTSE Russell. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
relative performance
Attribution analysis suggests that these outcomes have been driven primarily by company-level selection (+1.75%) rather than sector allocation (+0.37%). The methodology has tended to identify companies with comparatively stronger measured fundamentals within industries, with positive selection effects observed across multiple industries, including Consumer Discretionary, Industrials, Health Care and Technology.
From a factor perspective, back-tested data illustrate that the Russell 2000 Earnings Leaders Index has shown greater alignment with characteristics that are associated with profitability, cash generation and operational efficiency, while momentum exposure has remained broadly comparable to the Russell 2000 Index (Figure 3).
Figure 3. Factor Exposures
| Factor Exposures (Average of all monthly values over period) |
||
|---|---|---|
| Metric | Russell 2000 Earnings Leaders | Russell 2000 Index |
| Earnings Yield | 5.55% | 1.87% |
| Momentum | 21.33% | 22.88% |
| Return on Assets | 7.26% | 2.03% |
| Volatility | 5.21% | 6.19% |
Source: FTSE Russell. Index Research & Design, data as of December 31, 2024. For illustrative purposes only. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Industry weights further reflect the application of the earnings and improvement criteria (Figure 4). Industrials and Financials have represented larger active weights in the Russell 2000 Earnings Leaders Index—industries that, on average, have exhibited more consistent earnings profiles within small caps. In contrast, industries such as Health Care and Consumer Discretionary have tended to be underrepresented.
Figure 4. Industry Active Weights
| Industry Active Weights December 2024 |
|||
|---|---|---|---|
| Industry Name | Russell 2000 Earnings Leaders Weight | Russell 2000 Index Weight | Active Weight |
| Industrials | 34.06% | 19.38% | 14.67% |
| Financials | 19.66% | 17.85% | 1.81% |
| Real Estate | 6.83% | 6.40% | 0.43% |
| Utilities | 3.24% | 3.04% | 0.19% |
| Consumer Staples | 2.32% | 2.58% | -0.26% |
| Telecommunications | 1.49% | 1.83% | -0.34% |
| Energy | 4.36% | 5.49% | -1.14% |
| Technology | 10.15% | 11.67% | -1.52% |
| Basic Materials | 1.57% | 3.78% | -2.21% |
| Consumer Discretionary | 7.69% | 11.68% | -4.00% |
| Health Care | 8.64% | 16.29% | -7.65% |
Source: FTSE Russell. Index Research & Design, data as of December 31, 2024. For illustrative purposes only. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
A complementary perspective on small caps
The Russell 2000 Earnings Leaders Index illustrates how a targeted, rules-based lens can be applied within established benchmark frameworks to examine specific company characteristics. Importantly, the Russell 2000 Earnings Leaders Index is not intended to serve as a broad small-cap benchmark. With approximately 275 constituents, the index represents a defined subset of the Russell 2000 universe that meets established earnings and profitability improvement criteria.
Disclaimer
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