Last editedJun 20212 min read
You’re most likely familiar already with big-named stock indexes like the S&P 500 and the Dow Jones Industrial Average. However, there’s also a wealth of smaller indexes for investors to follow, one of which is the Russell 2000. Large or small, indexes serve as an important benchmark to follow market conditions. So, what is the Russell index, and how is it useful for investors? Here’s what you need to know.
What is the Russell 2000 index?
Sometimes shortened to Russell 2K, the Russell index measures the performance of 2,000 stocks with small market capitalization. These small-cap stocks are also included in the Russell 3000 index, which is a broad market index tracking almost all U.S. companies. It’s broken up into two smaller indexes:
Russell 1000: 1,000 largest companies
Russell 2000: 2,000 smaller companies
The index is rebalanced every June, when new companies are added, and old ones removed to fairly reflect the most current state of small capitalization performance.
How the Russell index works
The Russell 2000 was first created by the Frank Russell Company in 1984 to reflect the bottom two-thirds of the Russell 3000 index. While narrower indexes might focus on specific industries or show biases, the Russell 2000 is popular for its wide viewpoint of small-cap stocks. It’s favored by mutual fund investors in particular for this broad inclusion of smaller companies, which is believed to show a more accurate reflection of the market today.
There are also several small-cap subindexes included within the Russell 2000. For example, the Russell 2000 value index tracks companies with lower price-to book ratios. The Russell 2000 growth index shows companies with higher price-to-book ratios, or those expected to grow at a faster rate in the future.
What are the companies in the Russell 2000?
As its name suggests, the Russell 2000 includes 2,000 companies in total. While it’s not feasible to list all Russell 2000 companies, here’s a list of some of the most prominent as of June 2021.
Caesars Entertainment (CZR)
Plug Power (PLUG)
Penn National Gaming (PENN)
Mirati Therapeutics (MRTX)
Ultragenyx Pharma (RARE)
Deckers Outdoor (DECK)
Darling Ingredients (DAR)
With many major pharmaceutical companies represented on this list, for example, you can see that they’re not small businesses. However, they’re also not household name corporations. This is what differentiates the Russell 2000 value and growth indexes from headliners like the Dow Jones.
How to invest in the Russell 2000?
While it’s certainly possible to purchase all 2000 stocks to create a complex portfolio that mirrors the index, there are easier ways to invest. A Russell 2000 index fund allows you to replicate the index’s returns. Exchange-traded funds like iShares Russell 2000 index ETF closely track the index. Another popular Russell 2000 index fund is the Vanguard Russell 2000 ETF. Mutual funds and exchange-traded funds like these invest in all the index’s stocks on your behalf, according to their weights. Fees are kept low so that long-term performance is nearly identical to the Russell index.
What makes the Russell index unique?
There are many other indexes to choose from, so what makes the Russell 2000 unique? To begin with, it focuses on smaller companies than those that would be included in the S&P 500 or Russell 1000. Many of these are newer, in earlier, less established, and more volatile phases of growth.
Along with this volatility comes more dramatic swings in the index – along with higher potential returns. While established companies like Google or Apple probably won’t double in size during a year’s time, a small tech company has higher growth potential. Investing in the Russell 2000 also allows you to diversify your portfolio with a wider range of small-cap stocks, covering multiple industries and niches. This helps mitigate the risk involved.
If you’re looking for a way to get into investing without relying too heavily on a single company’s shares, an index fund tracking the Russell 2000 might be a good fit.
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