What Is the Russell 2000 Index?
The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index.
Many investors compare small-cap mutual fund performance with the Russell 2000 index because it reflects the return opportunity presented by the entire sub-section of that market rather than opportunities offered by narrower indices, which may contain biases or more stock-specific risk that distort a fund manager’s performance.
- The Russell 2000 index, created in 1984 by the Frank Russell Company, is a stock market index comprised of 2000 small-capitalization companies.
- It is made up of the bottom two-thirds of the Russell 3000 index, a larger index of 3000 publicly traded companies that represents nearly 98 percent of the investable U.S. stock market.
- The index is market-cap weighted and used as frequent benchmark for small-cap investors.
Understanding the Russell 2000 Index
The Russell 2000 index, created in 1984 by the Frank Russell Company, is a stock market index comprised of 2000 small-capitalization companies. It is made up of the bottom two-thirds of the Russell 3000 index, a larger index of 3000 publicly traded companies that represents nearly 98 percent of the investable U.S. stock market.
The Russell 2000 often serves as a benchmark for small-cap stocks in the United States.
The Russell 2000 index is a commonly used benchmark for mutual funds that identify themselves as "small-cap," much like the S&P 500 index is used to benchmark large capitalization stocks. (For related reading, see "S&P 500 vs. Russell 2000 ETF: What's the Difference?")
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. Many mutual funds and ETFs are tied to or based on the Russell 2000.
It is also the most widely quoted measure of the overall performance of small-cap to mid-cap stocks. The index represents approximately 8 percent of the total Russell 3000 market capitalization. As of December 31, 2017, the average value for a company on the Russell 2000 is $2.4 billion; the median market cap is $861 million. The market cap of the largest company in the index is almost $9.3 billion. It first traded above the 1,000 level on May 20, 2013. A similar small-cap index is the S&P SmallCap 600 from Standard & Poor's, but it's not as widely referenced.
Many regard the Russell 2000 as an important bellwether of the American economy because it measures the performance of smaller, domestically focused businesses. The Russell 2000 index is investable by replicating the index using component shares or through index futures, mutual funds, and exchange trading funds, such as the Russell 2000 index ETF. There are an active listed options for IWM and Russell 2000 index futures as well.
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, 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 full 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-book 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 major difference between the Russell 2000 and other major indices is that it benchmarks small-cap stocks. The S&P 500 and Dow Jones index, for instance, track large-cap stocks.