RV Blog Equities What is the Russell 3000?

What is the Russell 3000?

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The Russell 3000 is an equity index that tracks the largest 3,000 U.S. companies. It is market-capitalization weighted, meaning that each holding in the index receives a percentage size proportional to its total market cap. Overall, the index properly represents the broad market because it tracks 96% of the publicly listed U.S. equity market universe. It also has a diverse composition, holding a mix of large-caps, mid-caps, and small-caps.

The Russell Group, a subsidiary of the London Stock Exchange, launched the Russell 3000 on January 1, 1984. Investors use the index to measure investment performance and as a basis to create other investment securities such as exchange-traded funds (ETFs) and index-tracking funds. The index is rebalanced annually in June to factor in the changes in the market capitalizations of individual constituents. The rebalancing date is usually one of the highest-volume days on the market, as investors adjust their holdings to match the changes on the index.

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How does the Russell 3000 work?

The objective of the Russell 3000 index is to provide an accurate representation of the U.S. stock market and its underlying market segments. Because it tracks the performance of each company in the index, the FTSE Russell relies on a disciplined and well-defined maintenance process. In May each year, the Russell 3000 index is rebuilt. Reconstitution is vital to ensure the index accurately represents the stock market because companies grow or shrink over time. Furthermore, reconstitution brings in new and growing companies and removes companies impacted by corporate actions such as acquisitions, privatization, or mergers.

Companies must satisfy eligibility requirements to qualify for inclusion in the Russell 3000 index. FTSE Russell first determines whether a company is U.S.-based on three home-country indicators: country of incorporation, country of headquarters, and country of most liquid exchange. After qualifying as a U.S. company, the stocks also must satisfy the following criteria.

  • Trade exchange: Eligible companies must trade in one of the following markets, CBOE (Chicago Board Options Exchange), Nasdaq, Arca, NYSE, and NYSE American.
  • Minimum total market capitalization: A stock must have a market cap of at least $30 million to qualify.
  • Closing Price: The stock must have a closing stock price of at least $1 on the rank day in May.
  • Share Float: Companies must have at least 5% of their total shares available in the marketplace.
  • Company structure: FTSE Russell excludes company structures such as special purpose acquisition companies (SPACs), royalty trusts, business development companies (BDCs), and closed-end investment companies.

All eligible U.S. stocks are ranked based on their market capitalization, calculated by multiplying the shares outstanding by the last price traded on the rank day in May. The largest 3,000 companies that meet the inclusion criteria form the Russell 3000 reconstitution portfolio. Usually, the reconstitution of the index happens on the last Friday in June.

As of December 31, 2022, the largest ten constituents ranked by market cap were Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Berkshire Hathaway Inc. (BRK.B), Alphabet Inc. Cl A (GOOG), UnitedHealth Group Inc. (UNH), Alphabet Inc. Cl C (GOOGL), Johnson & Johnson (JNJ), ExxonMobil Corp. (XOM), and JPMorgan Chase & Co. (JPM).

Although the Russell 3000 overweights its 1,000 large-cap stocks, it includes 2,000 mid- and small-cap stocks. When compared with the Dow Jones Industrial Average and the S&P 500, tracking 30 and 500 stocks respectively, the Russell 3000 is a more inclusive index. Due to its diverse market capitalizations, it serves as a fundamental index that produces smaller indexes such as the Russell 2000 and Russell 1000.

  • Russell 2000: This index tracks the smallest companies in the Russell 3000, holding 2,000 small companies in the mid-cap and small-cap categories.
  • Russell 1000: An index of the 1,000 largest companies by market cap in the Russell 3000, tracking the performance of large-cap companies.

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Russell 3000 ETF Examples

It is cumbersome for individuals without the time and resources to buy all the 3,000 stocks in the index. Investors looking for U.S. exposure can conveniently do so through ETFs that use the Russell 3000 as a benchmark. The index provides a diverse universe of stocks of various styles, large-cap to small-cap, and excellent representation for all sectors in the stock market. Several ETFs from multiple providers are constructed based on the Russell 3000 index and track the investment results of companies therein.
Examples are:

iShares Russell 3000 ETF (IWV): BlackRock issues this ETF to provide exposure to a broad-based selection of U.S. companies in the Russell 3000 index. IWV is a great vehicle for investors looking for long-term portfolio growth in line with the U.S. equity market.

Vanguard Russell 3000 ETF (VTHR): VTHR invests in 3,000 stocks in the index and aims to mirror the returns of the U.S. stock market. Vanguard, the fund manager, replicates the composition and weighting of the Russell 3000 index while providing efficient trading and low fees.

Drawbacks of the Russell 3000

Although the Russell 3000 is a comprehensive benchmark for the broad U.S. market and features both large- and small-cap companies, it has some disadvantages. Because its market capitalization is weighted like the S&P 500, it overweights the largest companies, meaning that the ETFs or investors that track it receive more significant exposure to larger caps than smaller caps. Also, the index doesn’t have any profitability requirements like the S&P 500. Instead, it uses market capitalization as the main criterion, allowing the inclusion of lower-quality companies with no earnings.

In conclusion, the Russell 3000 index is a U.S. equity benchmark that tracks and measures the performance of the largest 3,000 companies in the U.S. It’s a popular index representing 96% of the total stock market universe and therefore a good proxy for the U.S. economy. Moreover, the Russell 3000 provides more extensive exposure to mid- and small-caps than the S&P 500 and the Dow Jones Industrial Average.

RELATED CATEGORIES: Equities, Market Analysis, U.S. Economy