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 FTSE Russell 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 its 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 future, index-based mutual fund, or ETF.
Understanding the Russell 2000 Index
The Russell 2000 index was launched in 1984 by the Frank Russell Company. It is now managed by FTSE Russell, which is a subsidiary of the London Stock Exchange (LSE) Group. The index is comprised of 2000 small-cap companies.
The Russell 2000 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.
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.
As of July 31, 2021, the average value for a company on the Russell 2000 was $3.27 billion; the median market cap was $1.19 billion. The Russell 2000 first traded above the 1,000 level on May 20, 2013.
The Russell 2000 index 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)
The smallest 1000 companies in the Russell 2000 make up the Russell 1000 Microcap Index.
Russell 2000 Index vs. Other Market Indices
Unlike the Dow Jones Industrial Average (DJIA), the Russell 2000 index is weighted by 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 capitalization) influence the index.
Other permutations of the Russell 2000 measure the performance of companies with special characteristics. For example, 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 ratios and lower forecasted growth values.
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 index, on the other hand, track large-cap stocks.
How Does the Russell 2000 Work?
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. Each June, the Russell 2000 is rebalanced and new companies are included or deleted from the index.
Why Is the Russell 2000 Annual Reconstitution Important?
In May and June each year, the Russell 2000 announces changes to the small-cap index. 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.