Alternative Proxy for Small Stocks in Measuring the Size Effect

In response to "Measuring the Size Effect with Capitalization-based ETFs" and in view of the research summarized in "Quality-enhanced Size Effect", a subscriber suggested using either iShares Core S&P Small-Cap ETF (IJR) or Vanguard S&P Small-Cap 600 Index Fund (VIOO) in place of iShares Russell 2000 ETF (IWM) as a proxy for small stocks. The idea behind this substitution is that IJR and VIOO select profitable companies from the S&P 600, while many Russell 2000 stocks are unprofitable. We choose IJR based on its much longer history, the same length as that for IWM. We again use SPDR S&P 500 ETF Trust (SPY) as a proxy for large stocks. We restate results for IWM for comparison. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly dividend-adjusted closing prices for IWM, IJR and SPY during May 2000 (limited by IWM and IJR) through March 2025, we find that: