Overview:
The S&P SmallCap 600 Index invests in a basket of small-cap equities. A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion. The index was introduced in 1994 in an effort to represent a smaller segment of the market than the S&P MidCap 400 Index. Although it is not yet widely quoted, the S&P SmallCap 600 Index has been gaining popularity among investment managers as an efficient way to track or invest in a largely illiquid market segment.

Composition:
The S&P SmallCap 600 Index consists of 600 small-cap stocks. Unlike the larger Russell 2000, which also tracks small-cap stocks, the S&P 600 has more stringent requirements for inclusion. Standard & Poor's adds new stocks to the index based not only on size, but also on financial viability, liquidity, adequate float size, and other trading requirements. This ensures that the index is comprised of higher-quality firms than its larger counterpart. Since the index contains only small firms, it represents a mere 3% of the value of the overall market. The S&P SmallCap 600 Index is market value weighted, meaning that larger firms have a greater influence on the index's performance than smaller firms. The index is relatively evenly distributed, as the top 10 holdings represent only 5% of the index’s value. The index's current holdings range in size from $60 million to over $3 billion, with the average company boasting a market cap of around $750 million.

Positives:
Though not as widely followed as the Russell 2000, the S&P SmallCap 600 Index arguably contains a mixture of more stable and profitable firms. As a result, the S&P 600 has outperformed the Russell 2000 by an average of 3% per year throughout the past decade. In addition, it has outperformed the broader market by an even larger margin. As a result of this outstanding performance, the S&P SmallCap 600 Index is quickly becoming a favorite for fund managers and smaller investors.

Drawbacks:
Roughly half as much money is invested in the S&P 600 relative to the larger Russell 2000. This makes the index much less liquid. While this is not necessarily a problem for small investors, it has kept the index from gaining popularity with some institutional managers.

How can I trade/invest in this index?
Several small mutual funds, as well as a handful of ETFs, track the performance of the S&P SmallCap 600 Index. One of the best ways to trade the index is via an investment in the iShares S&P SmallCap 600 Fund (symbol IJR). This exchange-traded fund can be bought or sold during regular market hours and carries an extremely low 0.20% expense ratio. Because it can prove quite expensive (and risky) to purchase a basket of individual small-cap stocks, this ETF provides a very efficient way to invest in this market-beating segment.

Additional Information:
S&P SmallCap 600 Index information from Standard & Poor's  
iShares S&P SmallCap 600 Index Fund (IJR)  
Additional iShares S&P SmallCap 600 Index Fund (IJR) information  

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