What Is the Russell 2000 Index?
The term Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 2000 is managed by London's FTSE Russell Group and is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
Many investors compare small-cap mutual funds against the index's movement as it is seen as a reflection of opportunities in that entire sub-section of the market than narrower indices, which may contain biases or more stock-specific risks that can distort performance.
- The Russell 2000 index is a market index comprised of 2,000 small-cap companies.
- The index was launched in 1984 by the Frank Russell Company and is now managed by FTSE Russell.
- The index is frequently used as a benchmark for measuring the performance of small-cap mutual funds.
- Many investors see the index's breadth as giving it an edge over narrower indexes of small-cap stocks.
- Investors can replicate the returns of the Russell 2000 Index by investing in an index-based mutual fund, or exchange-traded fund (ETF) that tracks the index.
Understanding the Russell 2000 Index
The Russell 2000 Index was launched in 1984 by the Frank Russell Company. It is a U.S. index and is managed by FTSE Russell, which is a subsidiary of the London Stock Exchange (LSE) Group. The index is comprised of 2,000 small-cap companies.
The index is the most widely quoted measure of the overall performance of small-cap to mid-cap stocks. It represents approximately 10% of the total Russell 3000 market capitalization. It is made up of the bottom two-thirds in company size of the Russell 3000 index. The larger index reflects the movements of nearly 98% of all publicly traded U.S. stocks.
As of Q1 2022, the index's top three holdings were Ovintiv, Avis Budget Group, and Antero Resources. It is heavily weighted in financials, followed by industrials and health care.
Mutual fund investors favor the Russell 2000 Index because it reflects the investment opportunity presented by the entire market rather than opportunities offered by narrower indices, which may contain bias or more stock-specific risk that can distort a fund manager’s performance. It's no surprise that many mutual funds and exchange-traded funds (ETFs) are tied to or based on the Russell 2000.
Russell 2000 Key Metrics
As of Q1 2022, the average value for a company on the Russell 2000 was $3.17 billion while the median market cap was $0.93 billion. The largest stock by market cap on the index was $15.1 billion. The Russell 2000 first traded above the 1,000 level on May 20, 2013.
Two sub-indexes of the Russell 2000 have been created to track the performance of companies within it that contain special characteristics that are desired by certain types of investors:
- The Russell 2000 Growth Index measures the performance of Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values.
- The Russell 2000 Value Index measures the performance of Russell 2000 companies with lower price-to-book (P/B) ratios and lower forecasted growth values.
The Russell 2000 Index is market cap-weighted, adjusted by each company's number of shares outstanding. This means that a member stock’s last sale price as well as the number of shares that can actually be traded (rather than the company’s entire market cap) influence the index.
The other big difference between the Russell 2000 and other major indices is that it tracks small-cap stocks. The S&P 500 and Dow Jones Industrial Average (DJIA) indices, on the other hand, track large-cap stocks.
The index's returns can be replicated by investors who take the trouble to create a sizeable and complex portfolio that mirrors the index. However, there are far easier ways to get the same returns. For instance, investors can use index futures or index-based mutual funds that track the Russell 2000. The most popular option is an ETF. The most heavily traded of the ETFs is the iShares Russell 2000 index ETF (IWM).
What Are the Russell 2000's Top Holdings?
As of Q1 2022, the top 10 holdings in the Russell 2000 Index by market capitalization included:
How Can I Invest in the Russell 2000?
Ordinary investors can invest in the Russell 2000 via index ETFs that track it, such as the BlackRock iShares Russell 2000 ETF (IWM) or Vanguard's Russell 2000 ETF (VTWO). There are also several Russell 2000 index mutual funds. More sophisticated investors may also trade Russell 2000 Index futures contracts.
How Does the Russell 2000 Differ From the S&P 500 Index?
The Russell 2000 is an index that tracks two thousand small-cap companies, while the S&P 500 tracks five hundred large-cap companies. Therefore, the two differ in both the number of stocks in the index and the sizes of those companies. Because of this, there is not much overlap, if any, between the stocks held in each index.
Both the S&P 500 and Russell 2000 indexes are market-cap-weighted. However, unlike the S&P 500 index, the securities in the Russell 2000 index are not selected by a committee. Instead, the holdings are determined through a formula based on their market cap and current index membership.
Why Is the Russell 2000 Annual Reconstitution Important?
The Russell 2000 announces changes to the small-cap index between May and June of each year. Because it is closely followed by mutual funds managers and individual investors, speculation as to which companies will be added can cause a jolt in short-term demand.
What Are the Small-Cap Subindexes of the Russell 2000?
There are a number of subindexes within the Russell 2000. The Russell 2000 Value Index tracks the performance of companies with lower price-to-book ratios, which shows a company’s market price relative to its balance sheet. The Russell 2000 Growth Index is a subset of companies with higher price-to-value ratios, or those expected to have higher growth values in the future.
The Bottom Line
The Russell 2000 is an index of 2,000 small-cap companies that was first launched in 1984. It is widely used as a benchmark for U.S. small-cap stocks. The index is comprised of the 2,000 smallest companies in the Russell 3000, which itself covers roughly 98% of the stocks publicly traded in the U.S. The Russell 2000 is rebalanced every June and new companies are included or deleted from the index.