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What Is the Russell 2000?

Sebencapital

Published
13/01/24
What Is the Russell 2000?

DEFINITION:

The Russell 2000 is a stock index that monitors 2,000 small-cap companies traded on the stock market. It's a popular and widely observed index in the United States.

What Is the Russell 2000?

You might know about the S&P 500, an index comprising 500 of the largest U.S. public companies. However, there's another important index called the Russell 2000, which is less known but widely referenced. This index focuses on smaller U.S. companies in terms of market capitalization.

Introduced in 1984 by the Frank Russell Company, the Russell 2000 is part of the Russell 3000, designed as a comprehensive benchmark for the entire U.S. stock market, covering about 98% of the nation's investable equity market.

The Russell 3000 consists of the 3,000 largest publicly traded companies by market capitalization, and within this, the Russell 2000 tracks the smallest 2,000. As of January 2022, the average weighted market capitalization of a Russell 2000 company was $3.13 billion. Here's a breakdown of the major sectors within the Russell 2000 at the close of 2021.

Source: FTSE Russell
Chart: The Balance Get the data Add this chart to your site

Note

You might recognize some companies in the Russell 2000, such as Dillard's, Bed Bath & Beyond, 1-800-Flowers, and Cracker Barrel Old Country Store.

How the Russell 2000 Performs

Let's check out how much money you could make from the Russell 2000 compared to the Russell 1000 (which includes larger companies) and the S&P 500 since the year 2000.

The Russell 2000 can be more unpredictable because smaller companies in it can see their values change rapidly. There are various ways to measure this unpredictability, but the iShares Russell 2000 ETF beta has been around 1.24 for quite some time (a beta of 1.0 is the market's average level of risk).

Russell Indices vs S&P Annual Returns

Although the Russell 2000 has generally followed the movements of the Russell 1000 and S&P 500, the ups and downs in its returns have been more pronounced.

Russell 2000 vs. S&P 500

As you observe, the Russell 2000, representing small-cap stocks, closely mirrors the movements of the S&P 500, which represents large-cap stocks. However, there are times when the Russell 2000 experiences more pronounced shifts in one direction or another. This is because small-cap stocks, being generally more volatile, react more significantly to market changes. Investors often choose to invest in both a Russell 2000 fund or ETF and an S&P 500 index fund to achieve a balanced portfolio, considering each index's reliability during specific economic phases.

Investing in the Russell 2000

If you're looking to invest in a broad range of small-cap stocks represented by the Russell 2000, you can consider mutual funds or ETFs that aim to mimic the index. Two well-known options are the iShares Russell 2000 ETF (IWM) and the Vanguard Russell 2000 ETF (VTWO).

Limitations of the Russell 2000

Some investors choose to monitor the Russell 2000 for insights into small-cap stocks. It's important to note that numerous companies, often referred to as "micro-cap" stocks, are excluded from the index. These micro-cap companies, while not part of the Russell 2000, can be some of the most rapidly growing stocks available.

Relying too much on the Russell 2000 for investment decisions may result in a lack of diversification across different industries and sectors. The index tends to show a preference for financials, health care, technology, and industrials, but it doesn't provide much exposure to companies in the communications and materials sectors.

Key Takeaways

  • The Russell 2000 index comprises 2,000 small-cap companies and is widely used in the U.S. markets.
  • The Russell 2000 closely follows the S&P 500 but experiences bigger fluctuations.
  • Investors holding the Russell 2000 can create a balanced portfolio by including large-cap indexes like the S&P 500 and incorporating a bit of exposure to micro-cap stocks.

Frequently Asked Questions (FAQs)

1. What does the Russell 2000 represent?

Many view the Russell 2000 Index as a potential indicator of the overall health of the U.S. economy. A decrease in the index is sometimes seen as an early signal that economic conditions may be shifting.

2. How many stocks are in the Russell 2000 Index?

This index is a subset of the Russell 3000 and contains the stocks of 2,000 small-cap companies.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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