What is the Russell 2000 Index?
Daily financial news and market stories often report the movement of three U.S. stock market indices: the S&P 500 Index, the Nasdaq Composite Index, and the Dow Jones Industrial Average. But there’s another benchmark index that represents an important portion of the U.S. stock market but doesn’t get the fanfare of the other indices: the Russell 2000 Index.
The Russell 2000 Index is a useful alternative to other well-known indices. It provides a snapshot of what is happening to smaller publicly traded U.S. companies. Learn more about the Russell 2000 Index, how it works, and how you can invest in it.
What Is the Russell 2000 Index?
The Russell 2000 Index is less of a household name when stock market benchmarks are cited. The Russell 2000 Index is an offshoot of the broader Russell 3000 Index. The Russell 3000 Index, which tracks 3,000 publicly traded companies in the U.S., is broken down into subsections: the Russell 1000 and the Russell 2000.
The Russell 2000 Index measures and tracks the performance of 2,000 smaller U.S. publicly traded companies. It’s largely weighted by its market value, which focuses on small-cap stocks whose value ranges between $300 million and $2 billion. These small-cap companies make up over 90% of companies trading in the U.S. stock market. As a result, the Russell 2000 provides a snapshot of how smaller-company stocks are performing. Small-cap-focused mutual funds can also use the Russell 2000 as a benchmark to compare their performance relative to the general market.
How the Russell 2000 Index Works
The Russell 2000 was launched in 1984 by the Frank Russell Company. As with other indices, the Russell 2000 Index is weighted by market cap. To be selected in the index, companies must first be listed on the Russell 3000, an index that comprises the 3,000 largest U.S.-based equities. FTSE Russell then selects the 2,000 smallest companies, removing billion-dollar corporations like Apple, Microsoft, and Tesla that are regarded as the core of the economy. As of January 2022, the average market cap of the Russell 2000 is $3.1 billion.
The index is a small-cap stocks pure play. It’s completely reconstituted annually to ensure that larger-cap stocks don’t distort the true performance and characteristics of small-cap stocks. The quarterly addition of IPOs also helps ensure the index remains small cap.
As of Dec. 31, 2021, the healthcare sector had the largest allocation in the index, at 17.5%. Financials, industrials, consumer discretionary, and technology complete the top-five sector classifications. Today, the FTSE Russell — a London Stock Exchange (LSE) subsidiary — maintains the Russell 2000 Index. FTSE Russell further breaks down the Russell 2000 into smaller indexes that can help investors track the performance of specific segments. Some of these smaller indexes include Russell 2000 Value, Russell 2000 Growth, Russell 2000 Dynamic, and Russell 2000 Defensive, among others.
The Russell 2000 vs. Other Indices
Since it’s a barometer for small-cap stocks, the Russell 2000 Index is quite a different benchmark compared to other major indices, like the Nasdaq, S&P 500, or the Dow Jones Industrial Average, which track larger companies.
The S&P 500 tracks 500 of the largest publicly traded companies. Investors often reference the S&P 500 to mean the performance of the general market. Due to its composition and the size of its holdings, the index is seen as the best reflection of the overall U.S. stock market.
The Dow Jones Industrial Average, commonly referred to as “the Dow,” comprises 30 of the largest blue-chip companies chosen to represent key industries of the U.S. economy. While these companies are supposed to reflect the general stock market, it isn’t necessarily the case since the index is significantly narrow.
The Nasdaq Composite, unlike the S&P 500 and the Dow, which are more general, focuses on the tech industry. It tracks 3,000 stocks listed on the Nasdaq stock exchange, which is the second largest after the NYSE.
The Russell 2000 differs from the three indices above based on the stocks it tracks. The Russell tracks small-cap companies while the Dow and S&P 500 track large-cap stocks. The Russell 2000’s focus on small-cap stocks means it may have more volatility than the indices above because smaller companies have limited resources and are more prone to adverse changes in the economy. However, with the greater risk comes a higher potential for exponential growth.
Economists also largely view the Russell 2000 Index as a more reasonably accurate reflection of the U.S. economy, more so since it applies to smaller equities. The index is also considered the bellwether for the U.S. economy because the smaller companies it tracks can help push job growth.
As mentioned earlier, the Russell 2000 is broken down into smaller permutations that track companies with special characteristics. For instance, the Russell 2000 Growth Index tracks companies carrying higher price-to-book ratios and higher predicted growth values. The Russell 2000 Value Index measures the performance of companies with lower price-to-book ratios and a lower growth forecast.
How to Invest in the Russell 2000
You don’t need to own all 2,000 stocks listed in the Russell 2000 to stay invested in the index. You can gain exposure to the Russell 2000 through exchange-traded funds (ETFs) and mutual funds that try to replicate the performance of the index. These funds typically carry lower fees, so their long-term performance may be virtually identical to what the index offers. Common ETFs that provide exposure to the Russell 2000 include the Vanguard Russell 2000 ETF (VTWO), BlackRock iShares Russell 2000 ETF (IWM), and ProShares UltraPro Russell2000 (URTY).
The Final Takeaway
The Russell 2000 is a U.S. stock market benchmark for small-cap companies and a barometer for the U.S. economy’s health. Investors can gain exposure to this index through low-cost mutual funds and ETFs that try to replicate the Russell 2000. Note that every June, the Russell 2000 is reconstituted, and new companies are deleted or listed on the index.