The Russell 2000 index tracks 2,000 publicly traded small-capitalization companies. It is one of the most widely followed market indexes in the U.S.
Investors in the stock market often use indexes as barometers of performance in particular areas. These groupings offer an easy way to follow specific segments of the market, according to company size, industry, sector, or geography. Many invest in mutual funds and exchange-traded funds (ETFs) designed to mirror the performance of a particular index. One of those often replicated is the Russell 2000.
What Is the Russell 2000?
You’re probably familiar with the S&P 500, which includes 500 of the largest publicly traded companies in the U.S. But another widely cited benchmark that’s less of a household name is the Russell 2000 Index. This tracks the performance of U.S. companies with a smaller capitalization.
The Russell 2000 is one of several U.S. indexes started in 1984 by the Frank Russell Company, which is now part of FTSE Russell, a unit of the London Stock Exchange Group. It’s a subset of the Russell 3000, which aims to be a benchmark for the entire U.S. stock market and represents about 98% of the country’s investable equity market.
The Russell 3000 includes the 3,000 largest publicly held companies by market capitalization, and the Russell 2000 tracks the smallest 2,000 among them. The average weighted market cap of a Russell 2000 company was $1.9 billion as of May 2020. Here’s how the major sectors of the Russell 2000 broke down at the end of 2019.
Knowing how these sectors are weighted can help you craft your overall investment strategy. For example, if you are invested in a fund that tracks the Russell 2000, you may be less inclined to buy shares of a publicly traded bank because the index is so heavily weighted to financial stocks. Instead, you may decide to purchase shares of an oil or telecommunications company.
Some of the more familiar companies in the Russell 2000 as of July 2020 include 1-800-Flowers.com, Vonage Holdings, Rite Aid Corp., and Cooper Tire & Rubber Co.
How the Russell 2000 Performs
Here’s a look at the total annual returns of the Russell 2000 compared to the Russell 1000 (the large-cap portion of the Russell 3000) and the S&P 500 since 2000.
The Russell 2000 has a tendency to be more volatile because small-cap stocks can change in value quickly. Measures of volatility can differ, but the iShares Russell 2000 ETF reported a beta figure of 1.31 in July 2020. This means that the ETF is 31% more volatile than the market on average. For an investor, this means that returns are less consistent.
Russell 2000 vs. S&P 500
As you can see, the small-cap Russell 2000 tracks fairly closely with the large-cap S&P 500, though there are times where it moves more dramatically in one direction or another. This is because small-cap stocks are more volatile in general, so they respond more dramatically to shifts in the market. Each index will be more reliable during certain economic phases, so many investors will purchase shares of a Russell 2000 fund or ETF alongside an index fund for the S&P 500 in order to create a balanced portfolio.
Investing in the Russell 2000
Investors who want exposure to the breadth of companies in the Russell 2000 can invest in a mutual fund or ETF designed to track the index. Two popular offerings include the iShares Russell 2000 ETF [NYSE: IWM] and the Vanguard Russell 2000 ETF [NYSE: VTWO].
Limitations of the Russell 2000
Investors who want access to small-cap stocks often track the Russell 2000, but keep in mind there are hundreds of companies too small to be included in the index. The “micro-cap” category, excluded from the Russell 2000, represents the smallest companies available on the market, but also some of the fastest-growing.
Investors too reliant on the Russell 2000 may also lack diversification across industries and sectors. The index tends to heavily favor financials, health care companies, and industrials but has limited exposure to companies in the communications and materials sectors.
- The Russell 2000 index includes 2,000 small-cap companies and is one of the most popular indexes for U.S. markets.
- In general, the Russell 2000 tracks fairly closely with the S&P 500 but is subject to larger swings.
- Investors in the Russell 2000 can balance their portfolio by investing in large-cap indexes such as the S&P 500, as well as adding in some micro-cap exposure.