What Is the Russell 2000?

Definition & Examples of the Russell 2000

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Indexes are often used as barometers of performance in particular areas. Stocks are chosen based on specifications set by the analysts that manage the index; they are then grouped to form the index. Many people invest in mutual funds and exchange-traded funds (ETFs) that either mirror or come close to mirroring the performance of a particular index. One of those often replicated is the Russell 2000.

The Russell 2000 is a stock index that tracks 2,000 publicly traded small-capitalization companies. It is one of the most widely followed market indexes in the U.S. Find out more about this index to help you decide whether you should invest in a fund that tracks it.

What Is the Russell 2000?

You may be familiar with the S&P 500, an index of 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 index tracks select U.S. companies with a smaller market capitalization.

The Russell 2000 is one of several U.S. indexes started in 1984 by the Frank Russell Company. The Russel 2000 is a subset of the Russell 3000, which aims to be a benchmark for the U.S. stock market as a whole 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 2020.

Knowing how these sectors are weighted can help you craft your investment strategy. For instance, say you have money in a fund that tracks the Russell 2000 and want to buy more stocks. You may not want to buy shares of a publicly traded bank because the Russell 2000 is 14.9% financial stocks. Instead, you may decide to purchase shares in another sector the fund doesn't have a large percentage of holdings in. 

Some companies in the Russell 2000 you might know are Dillard's, Bed Bath & Beyond, Inc., 1-800-Flowers.com, and Cracker Barrel Old Country Store, Inc.

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 tends to be more volatile because small-cap stocks can change in value quickly. Volatility measures can differ, but the iShares Russell 2000 ETF beta has stayed close to 1.3 for several years (a beta of 1.0 is the market's average risk level). This means that the ETF is 30% more volatile than the market on average.

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 to create a balanced portfolio.

Investing in the Russell 2000

Investors who want exposure to the breadth of 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 

Some investors who want access to small-cap stocks often track the Russell 2000; keep in mind that hundreds of companies are 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. However, they are some of the fastest-growing stocks around.

Investors who are too reliant on the Russell 2000 may lack diversification across industries and sectors. For instance, the index tends to heavily favor financials, health care, technology, and industrials but has limited exposure to companies in the communications and materials sectors.

Key Takeaways

  • The Russell 2000 index includes 2,000 small-cap companies and is one of the most popular indexes for U.S. markets.
  • 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 and adding in some micro-cap exposure.