Active Versus Passive Index Management : A Performance Comparison of the S&P and the Russell Indexes

The Samp;P and the Russell indexes often serve as proxies for passive portfolios in the debate over the merits of active versus passive portfolio management. However, the Samp;P indexes, are, in effect, actively constructed portfolios, since Samp;P index managers exercise discretion in selecting firms for the indexes from a pool of eligible firms. In contrast, Russell index managers use a passive, nondiscretionary approach and select firms solely based on market capitalization. I assess the relative merits of these approaches by comparing their performance over the last 11 years. I find that the Samp;P indexes dominate the Russell indexes, particularly in the small-cap sector, where the Samp;P 600 index consistently outperforms the Russell 2000 index. The results suggest that index investors would benefit by choosing actively constructed index portfolios over passively constructed index portfolios, particularly in the small-cap sector