Why U.S. Large Cap Growth’s Banner Year Didn’t Look The Same Across Index Providers

By Catherine Yoshimoto, Director, Product Management

Russell created the industry’s first style indexes in 1987 to provide investors with accurate benchmarks for measuring the growth and value of 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

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 (MSFT), Amazon (AMZN), and Meta (META) relative to the S&P Growth contributed significantly to active return. 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)

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Source: Morningstar Direct, as of December 29, 2023. S&P source: iShares S&P 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

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Source: FTSE Russell and S&P. 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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