Stock market or equity indexes are composite measurements reflecting price movements of component stocks. Investors use indexes as a benchmark to gauge portfolio performance and as a barometer for overall market sentiment. When stock indexes trend upward, it reflects a bull market; when they trend lower, it signifies a bear market. In the United States, two of the most popular stock market indexes are the S&P 500 and the Russell 2000.
- The S&P 500 index is an equity index comprised of 500 large-capitalization companies.
- The Russell 2000 index is a stock market index comprised of 2000 small-capitalization companies.
- Both indexes are market-cap weighted, with the S&P 500 used as a large-cap benchmark and the Russell 2000 as a small-cap proxy.
The S&P 500 Index
The Standard & Poor's 500, or S&P 500 index, is an equity index comprised of 500 large-capitalization companies listed on U.S. exchanges. A large-capitalization, or large-cap, company typically has a market value greater than $10 billion. The S&P 500 is one of the most widely used benchmarks corresponding to the broader U.S. stock market. Due to its composition of 500 companies, the S&P 500 is a much broader, and perhaps accurate, measure than the popular Dow Jones Industrial Average (DJIA), which contains just 30 stocks.
The S&P 500 was introduced in 1923 and took on its present form on March 4, 1957. A committee from S&P Dow Jones Indices—a joint venture consisting of S&P Global Inc. (SPGI), the CME Group (CME), and News Corporation (NWSA)—select the index's constituent companies. The aim is to pick companies in industries and market segments that mirror the U.S. economy.
S&P 500 Weighting
Shares are weighted by market capitalization, resulting in a cap-weighted or value-weighted index in which companies with larger market values receive relatively greater weight. More specifically, the S&P 500 is also float-weighted, which calculates a company's market capitalization using only the number of shares available for trading by the public. This helps to reflect a firm's investable valuation accurately. The S&P is also diverse in that it holds both growth and value stocks.
From time to time, the makeup of the index is adjusted to account for mergers and acquisitions, bankruptcies, special dividends, share repurchases, and new share issuances. Companies may be added or removed as the landscape of the U.S. economy changes, or as companies fail to meet listing criteria, such as market valuation and financial viability.
Investing in the S&P 500
The S&P 500 is an investable index, making it useful as a benchmark for the entire U.S. stock market. Investors and traders can replicate the S&P 500 by buying the component stocks using the same weights as the index. Accumulating positions in 500 different shares can be costly and time-consuming, so alternatives exist to make investing in the index easier, including S&P 500 futures, indexed mutual funds, and indexed exchange-traded funds (ETFs) like the SPDR S&P 500 ETF Trust (SPY). There's also an active and liquid options market on S&P 500 futures and the SPY ETF, allowing well-diversified large-cap portfolios to be hedged.
S&P 500 Top Components
As of Dec. 21, 2020, the top 10 holdings in the S&P 500 by market capitalization (based on the SPDR® S&P 500® ETF Trust, which is a proxy for the S&P 500 index) include:
- Apple Inc. (AAPL)
- Microsoft (MSFT),
- Amazon.com Inc. (AMZN)
- Facebook Inc. (FB),
- Alphabet Inc. (GOOGL)
- Alphabet Inc. (GOOG)
- Tesla (TSLA)
- Berkshire Hathaway (BRK.B)
- Johnson & Johnson (JNJ)
- JPMorgan Chase (JPM)
The Russell 2000 index, created in 1984 by the Frank Russell Company, is a stock market index comprised of 2000 small-capitalization companies. It's made up of the bottom two-thirds of the Russell 3000 index, a larger index of 3000 publicly traded companies that represent nearly 98% of the investable U.S. stock market.
While the S&P 500 is a suitable benchmark for large-cap portfolios, the Russell 2000 is the most common benchmark for small-cap ones. Investors typically monitor this index to gauge the performance of smaller, domestically-focused businesses. The smallest 1000 companies in the Russell 2000 make up the Russell 1000 Microcap Index. The Russell 2000 index is constructed to be representative of the smallest 2000 listed companies in the U.S.
Russell 2000 Weighting
The Russell 2000 is another market-capitalization-weighted index, but it excludes certain listed stocks, such as those trading below $1.00 per share, those trading on the over-the-counter (OTC) market, and companies with a market capitalization under $30 million. Unlike the S&P 500, the components of the Russell 2000 index are selected by a formula—the bottom 2000 of the Russell 3000—and not by a committee.
Investing in the Russell 2000
Like the S&P 500, the Russell 2000 index is investable by replicating the index using component shares or through index futures, mutual funds, and exchange trading funds like the iShares Russell 2000 index ETF (IWM). There's also an active listed options market for IWM and Russell 2000 futures.
Russell 2000 Top Components
As of Nov. 30, 2020, the top 10 holdings in the Russell 2000 by market capitalization include:
- Caesars Entertainment (CZR)
- Penn National Gaming (PENN)
- Plug Power (PLUG)
- Mirati Therapeutics (MRTX)
- Sunrun (RUN)
- Novavax (NVAX)
- Darling Ingredients (DAR)
- Lithia Motors (LAD)
- Ultragenyx Pharma (RARE)
- Deckers Outdoor (DECK)
The Bottom Line
The S&P 500 and Russell 2000 are both investable, market-capitalization-weighted U.S. indexes commonly used as benchmarks by portfolio managers and investors. There are also several differences between the two indexes. The S&P 500 is comprised solely of large-capitalization companies and serves as the most common large-cap benchmark. A committee selects constituent stocks, which contain just one-fourth of the number of companies listed in the Russell 2000. Alternatively, the Russell 2000 is an appropriate benchmark for small-cap portfolios, with a formula determining member stocks rather than a committee.