What Is the Russell 3000 Index?
The Russell 3000 Index is a market-capitalization-weighted equity index maintained by the FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities.
Understanding the Russell 3000 Index
The Russell 3000 Index serves as a building block for a broad range of financial products which include the large-cap Russell 1000 and the small-cap Russell 2000 index. The largest 1,000 stocks indexed in the Russell 3000 constitute the Russell 1000, while the Russell 2000 is a subset of the smallest 2000 components. Unlike other funds, the Russell 3000 does not attempt to outperform a benchmark or take a defensive position when the markets appear overvalued; instead, it employs a fully passive strategy.
- The Russell 3000 Index is a market-capitalization-weighted equity index.
- The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 98% of all U.S incorporated equity securities.
- The Russell 3000 Index serves as the basis for a broad range of market indexes, such as the large-cap Russell 1000 and the small-cap Russell 2000 index.
- Large cap stocks direct a majority of the index's performance, while the returns of other segments are overlooked.
Stocks in the Russell 3000 index is reconstituted once a year on the last Friday in June. At this time, all eligible securities are ranked by their current market capitalization. This ensures growing or shrinking companies are accurately represented in the overall index. At any time, if a security is no longer eligible for membership then a replacement is named at the next scheduled reconstitution. Thus, the number of securities in the index will fluctuate according to corporate actions such as mergers, acquisitions or going private.
A significant portion of the underlying index is represented by securities in the financial, consumer discretionary, health care and technology sectors. Technology's weighting in the index has steadily increased over the past decade as many companies adopt to an increasingly tech focused economy. Sure enough, the biggest holdings comprise of tech giants such as Microsoft (MSFT), Facebook (FB), Google (GOOGL). Today, the average market capitalization of stocks in the index stands at $161 billion owing to the extended rally in the stock market.
A significant portion of the Russell 3000 comprises securities in the financial, consumer discretionary, health care, and technology sectors.
Limitations of the Russell 3000 Index
Many investors often make the mistake of buying the Russell 3000 as a way of securing a diversified mix of large-cap, mid-cap, and small-cap stock. However, the truth is that large cap stocks direct a majority of the index's performance while the returns of other segments are overlooked. As a result, the performance of the Russell 3000 often exhibits a high correlation with the S&P 500 and does not effectively capture the total stock market. A more effective way of building a diversified portfolio is to invest in multiple funds across various categories such as domestic stocks, foreign securities, and income instruments.