FTSE Russell Insights

Why US large cap growth’s banner year didn’t look the same across index providers

Catherine Yoshimoto

Catherine Yoshimoto

Director, Product Management
  • Methodology differences influence the classification of growth stocks.
  • Meta's 2022 plunge and 2023 recovery exemplify style index impact.
  • Structural nuances, like the absence of a momentum variable, shape index behavior.

Russell created the industry's first style indexes in 1987 to provide investors with accurate benchmarks for measuring the growth and value equity market segments. And while they’ve since paved the way for the creation of more style-specific benchmarks, it’s important to note that not all are created equal. A comparison of 2023 US large cap growth index performance is a reminder that indexes tracking the same market segment can be built differently.

US large cap growth outshone the rest in 2023

US large cap growth equities surged in 2023, powered by the rally in mega cap tech stocks and other potential beneficiaries of the recent advances in artificial intelligence (AI). Declining oil prices also boosted large cap growth performance relative to value, as value indexes tend to be more heavily weighted in the energy sector.

However, while both the Russell 1000 Growth and S&P 500 Growth performance reflected large cap growth’s banner year, the return difference between the two indexes tracking the same market segment was significant. As shown, the Russell 1000 Growth returned 42.68% in 2023, compared with 30.03% for the S&P 500 Growth. 

2023 Style Index Performance

Chart shows the Russell 1000 Growth returned 42.68% in 2023, compared with 30.03% for the S&P 500 Growth.

Source: FTSE Russell and Morningstar Direct, as of 12/29/2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures. 

Several constituents are behind the difference

The constituents that contributed most to Russell 1000 Growth outperformance reveal the story behind the performance difference. As the Magnificent Seven primarily fueled large cap growth’s 2023 rally, the Russell 1000 Growth overweight in Microsoft, Amazon, and Meta relative to the S&P Growth contributed significantly to active return. And as the energy sector slumped in 2023, the Russell 1000 Growth underweight in oil companies such as Exxon Mobil and Chevron boosted relative returns. 

2023 Highest 10 Active Return Contributors Russell 1000 Growth (R1G) relative to S&P 500 Growth (SP5G)

Name Active Ret% Reason for difference
Microsoft Corp 1.83 +5.5% weight in R1G 
Amazon.com Inc 1.53 +3.1% weight in R1G
Pfizer Inc 1.17 0% weight in R1G
Meta Platforms Inc Class A 1 0% weight in SP5G
Exxon Mobil Corp 0.89 0% weight in R1G
Eli Lilly and Co 0.65 +0.2% weight in R1G
Chevron Corp 0.62 0% weight in R1G
Johnson & Johnson 0.59 0% weight in R1G
Bristol-Myers Squibb Co 0.45 0% weight in R1G
Merck & Co Inc 0.44 -0.8% weight in R1G

Source: Morningstar Direct, as of December 29, 2023. S&P source: iShares S&P 500 Growth ETF (https://www.ishares.com/us/products/239725/ishares-sp-500-growth-etf). Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures. 

It comes down to methodology differences

Such a pronounced difference in performance raises questions as to how two indexes measuring the same market segment can be meaningfully dissimilar in composition—and the answer comes down to methodology. Like all indexes, the Russell 1000 Growth and the S&P 500 Growth are products of their methodologies. And while a side-by-side comparison of style index methodology reveals some similarities, it also sheds light on some considerable differences.

Style index methodology comparison

 

Russell US Style Indexes

S&P US Style Indexes

Launch date

Single factor: 1987; Multi-factor: 1994

1992

Reconstitution

Annually in June.

Share changes and IPO updates quarterly.

Annually in December

Style application

Value and growth calculated for Russell 1000, 2000, and microcap only stocks. Banding is applied to limit turnover between styles.

Value and growth calculated for each company in the S&P Total Market Index.

Variables

Value: (1) Book to Price

Growth: (1) IBES forecast medium-term growth, (2) Historical sales per share growth (IBES forecast long-term growth replaced in 2011 due to low coverage)

 

Value: (1) Book Value to price, (2) Sales to price, (3) Earnings to price

Growth: (1) 3 year change in EPS over price per share, (2) 3 year Sales per Share growth rate, (3) Momentum (12 month % price change). 

Substitution

Substitute missing (and negative B/P) data with the value/growth score of the average peer group (ICB averages).

IPOs are also classified using the peer group average.

 

When Book Value to Price Ratio, Earnings to Price Ratio, or Sales to Price Ratio is not available the factor is set to zero.

If 3 years is not available then 2 years is used; if 2 years not available then 1 year is used. If one year is not available factor set to zero.

New additions are classified using GICS industry average.

Growth and Value percentages

50% of the index market value is allocated to value and growth. Approximately 70% of the market value is classified as all value or all growth and 30% allocated to both.

Market cap is divided equally into Growth and Value. Approximately 66% of the market cap is classified as all growth or all value and 34% as blended

Source: FTSE Russell and S&P (http://us.spindices.com/).  As of June 2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures. 

With respect to the 2023 US large cap growth index performance divergence, one methodology difference is perhaps particularly meaningful. When determining whether a constituent should be classified as growth, the S&P US Style Indexes use price momentum—or 12-month % price change—as a variable. As such, when these indexes are reconstituted every December, companies that have underperformed for the previous year are less likely to be classified as growth. 

Meta is an apt illustration of how this methodology difference can impact style index composition and relative performance. The company’s stock plummeted -64.2% in 2022, and consequently the entirety of its market cap was assigned to the S&P 500 Value Index in the December 2022 reconstitution. And when Meta was among the mega cap companies that led the charge in the 2023 rally, S&P 500 Growth Index performance suffered relative to the Russell 1000 Growth.

Conversely, US large cap oil companies such as Exxon Mobil and Chevron fared well in 2022 amid inflationary pressures, and were thus assigned weights in the S&P 500 Growth. However, in the absence of a price momentum growth variable, they weren’t eligible for inclusion in the Russell 1000 Growth.  As a result, the energy sector’s abysmal 2023 also took a toll on relative S&P 500 Growth performance.

The objective is accurate reflection, not outperformance 

Russell indexes aren’t constructed with the objective of outperforming other indexes. Rather, they’re built to reflect the performance of the market segment they’re intended to represent. Different index providers can use varying approaches and rules to govern a given index’s market coverage, construction methodology, and maintenance. And those structural differences can translate into significant differences in securities that are included—and as a result, affect how that index behaves in varying market conditions. 

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