In the indexing world there are two different approaches to combining market-cap benchmarks:
1) Two-Tier: Large + Small
Historically, many investors have followed the lead of Russell and Standard & Poor’s as they split the universe of stocks into large stocks and small stocks. Russell offers the Russell 1000 to represent large-cap stocks in combination with the Russell 2000 to track small-cap stocks.
Similarly, Standard & Poor’s uses the flagship S&P 500 Index for large and the S&P Completion Index for small exposure.
2) Three-Tier: Large + Mid + Small
On the other hand, many index providers offer a second approach that carves out mid-cap securities as a distinct asset class. In this paradigm, three indexes are used to capture the full market-cap spectrum (MSCI Large + Mid + Small and S&P 500 + S&P 400 + S&P 600). This strategy aligns nicely with Morningstar’s nine-box approach to mutual fund classification.
The combined-size approach constructs indexes that function effectively in both building block scenarios. For the two-tier approach, an investor can combine CRSP Large + CRSP Small, or if a three-tier approach is preferred, the investor can use CRSP Mega + CRSP Mid + CRSP Small.
The one potential point of caution: If investors combine CRSP Large + CRSP Mid + CRSP Small, they have an overweight position in mid-cap stocks since large is already made up of Mega + Mid.