What Is the Russell 2000?
Small can be good.
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.
Investors in the stock market often use indices 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.
Russell 2000 Basics
The Russell 2000 is one of several U.S. indices 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 is the smallest 2,000 among them.
The average weighted market cap of a Russell 2000 company was $2.25 billion as of September 2019. Here’s how the major sectors of the Russell 2000 broke down at that time.
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 September 2019 include Peoples Bancorp, 1-800-Flowers.com, Vonage Holdings, Rite Aid Corp., and Cooper Tire & Rubber Co.
Performance of the Russell 2000
Here’s a look at the total annual returns of the Russell 2000 compared to the Russell 1000 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 reports a beta figure of 1.24. This means that the ETF is 24% more volatile than the S&P 500. For an investor, this means that returns are less consistent.
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 exchange-traded fund designed to track the index. Two popular offerings include the iShares Russell 2000 ETF [NYSE: IWM] and the Vanguard Russell 2000 ETF [NYSE: VTWO].
Many investors will purchase shares of a Russell 2000 fund or ETF alongside an index fund for the S&P 500.
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. As of September 2019, the index was heavily comprised of financials, health care companies, and industrials, but had limited exposure to companies in the communications and materials sectors.
FTSE Russell. "Russell US Indexes – 40 years of insights," Page 4. Accessed Oct. 22, 2019.
FTSE Russell. "Russell 2000 Index," Accessed Oct. 22, 2019.
FTSE Russell. "Russell US Index Series Monthly Review - Downloads," Download 'Russell 2000.' Accessed Oct. 22, 2019.