Why Large-Cap Super Micro Computer Is Still in the Small-Cap Russell 2000 Index

Super Micro Computer Inc.’s (SMCI) market capitalization of $52.9 billion ranks in the 96th percentile of all U.S.-listed companies. Given this market cap, it is not surprising to see that this stock is a member of the large-cap S&P 500 index.

What may surprise you is that Super Micro Computer is also part of the small-cap Russell 2000 index.

As of March 31, 2024, all 10 of the Russell 2000’s biggest companies have market caps ranking in the largest 16% of exchange-listed stocks. Two others besides Super Micro Computer rank in the top 10%. MicroStrategy Inc. (MSTR) has a market cap of $24.5 billion (93rd percentile) and Carvana Co. (CVNA) has a market cap of $16.9 billion (90th percentile). Seven of the Russell 2000’s 10 largest stocks are either in the S&P 500 or the S&P MidCap 400 index.

The paradox of these companies both being large in size and part of the Russell 2000 is a result of how the index is constructed and maintained. Even a small understanding of index construction will help you better select exchange-traded funds (ETFs), mutual funds and stocks for your portfolio.

The Russell 2000 tracks approximately the 2,000 smallest companies within the broader Russell 3000 index. The Russell 1000 index tracks the 1,000 largest U.S. companies. Both indexes—as well as the Russell 3000 (which includes both the 1000 and 2000 indexes)—are reconstituted annually. The reconstitution process completely rebuilds these Russell indexes.

Hence, when a company soars in value because of its ties to artificial intelligence (AI) or bitcoin—Super Micro Computer and MicroStrategy, respectively—no midyear adjustments are made to the indexes. While this does eventually lead to some style drift (a large-cap stock in a small-cap index), what we are seeing now is unusual. Super Micro Computer’s approximate 2% weighting in the Russell 2000 “is by far the biggest single-stock weight ever in the index” Jefferies Financial equity analyst Steven DeSanctis told The Wall Street Journal last week.

Barring big shifts in the 10 stocks’ market caps, they are expected to be moved up to the Russell 1000 this summer. The three Russell indexes’ reconstitution process will be finalized after the close of trading on June 28. Preliminary additions and deletions will be announced in the evening on May 24.

Changes to the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600 index are “made on an as-needed basis” instead of on a recurring annual basis. Furthermore, the three S&P indexes are never reconstituted like the Russell indexes are. Rather, changes involving a very small number of companies are announced sporadically.

These differences in the timing of when stocks are added and removed explain why Super Micro Computer can be in both the S&P 500 and Russell 2000.

As to which indexes are better is a matter of opinion. The Russell 1000 and 2000 cover a broader number of stocks than the S&P 500, MidCap 400 and SmallCap 600 do. The S&P indexes account for considerations such as sector diversification, whereas the Russell indexes are more purely quantitative (and thereby more passive). The S&P indexes can be less prone to style drift with their ability to move companies between indexes or remove them completely at any point.

Perhaps the biggest deciding factor may be your desire to go large and small. The S&P 500 limits itself to larger companies than the Russell 1000 does. The Russell 2000 holds smaller companies than the S&P SmallCap 400.