News Analyst
We have covered a few different index topics recently, from looking at what makes a company American to how much of your shares outstanding really could be owned by index trackers if you’re added to a major U.S. index.
This week, we look at what makes a company large, medium or small cap. The short answer is it depends – mostly on each index provider’s definitions of size.
Cutoffs change all the time
Each index provider appears to think differently when defining size categories. For example:
- S&P calls its S&P 500 a large-cap index, while the S&P 400 is called its mid-cap index.
- In contrast, the Russell 1000 is typically called its large-cap index, even though it has more companies than the S&P 500 and S&P 400 combined.
On top of that, index inclusion rules mean not all stocks qualify for all index families.
Then, even if you perform an annual “reset” like Russell does, stock prices move over time, making some companies increase in size and other companies shrink.
In fact, if we look at the market capitalization of companies in all the major U.S. indexes, we see significant overlap – both within index families and across market cap cutoffs – as Chart 1 shows:
Chart 1: Stocks included in major U.S. indexes by market cap category
The data in Chart 1 shows how the different indexes work, where the:
- Minimum size for index addition: The pink line shows the most recent public “auto addition” market-cap cutoff level. We can see that all indexes now include companies well below those addition levels (although most indexes also allow a “buffer zone” to reduce unnecessary index turnover as companies fall out and back into indexes).
- Many microcap stocks are not in a major index: The market capitalization of all companies in the U.S. markets (grey) stretches well below the smallest stock in the Russell 2000 small-cap index.
- Different providers have different “size” cutoffs: The Russell 2000 small-cap index has a median market cap (where the grey boxes meet) that is around the same size as the “add level” for the S&P 600 small-cap index.
- Index families still have an overlap: Almost half of the stocks in the S&P 400 are larger than the smallest stock in the larger-cap S&P 500 index; same for the S&P 600 small-cap index versus the larger-cap S&P 400.
- Buffer zones are used to minimize turnover: Despite the Russell reconstitution resetting size indexes in June 2024, even they have “buffer zones” meant to reduce unnecessary switching between indexes for stocks near the cutoff.
- Not all stocks are in all indexes: The Nasdaq-100® and the Nasdaq Next Generation 100™ indexes include a total of just 200 companies combined; however, the smallest company in the Nasdaq Next Generation 100™ Index is close to the same size as the smallest company in the S&P 500.
So, exactly what are the cutoffs?
The dot plot above is great to compare constituent level information – and the distribution of market caps in each index and index family – using current prices.
But sometimes it’s useful to know what the exact cutoffs and market cap characteristics are in each index. We list them in Table 1, based on September 2024 prices.
Table 1: Key market cap index statistics (as of September 2024)
What if we could perfectly break out the market?
What if we could create our own buckets based on all U.S. listed companies (the grey dots in Chart 1), with 1000 companies in each size group and no buffer zones? As Chart 2 shows, there would be five market-cap groups, although the nano-cap group currently has more than 1,000 stocks.
- The largest cap buckets start around $7.3 billion.
- Mid cap ranges from $1.7 billion to $7.2 billion.
- Small cap ranges from $450 million to $1.6 billion.
Chart 2: Equal count buckets and market cap cutoffs
Of course, people might argue with how we have defined market cap buckets here, too.
Size depends on the index provider
What we see from this study, is that “size” categories vary considerably depending on the rules of the index providers.
However, if you want a “general rule of thumb” that is agnostic to index provider and an easy to remember round number, it looks like you could use these cutoffs:
- Large cap is above $10 billion.
- Mid cap is down from $10 billion to $2 billion (or maybe a little lower).
- Small cap is no larger than $2 billion, and potentially as low as $200 million market cap.
At least, that’s for now, at 2024 prices.
