Russell 2000: Tracking and Investing in 2,000 Small Businesses | Investment
The Russell 2000 is a stock market index that tracks the performance of 2,000 small-cap U.S. public companies. Managed by the UK-based FTSE Russell Group, the Russell 2000 is a subset of the Russell 3000 Index.
What is the Russell 2000 Index?
The Russell 2000 Index tracks the 2,000 smallest public companies by market capitalization at its parent company Russell 3000 stock index. The remaining 1,000 companies are aggregated into the Russell 1000 Large Cap Equity Index.
Because small capitalization companieslike those included in the Russell 2000, represent a much smaller share of the U.S. stock market than large capitals, Russell 2000 companies represent about 10% of the total market capitalization of the US stock market. By comparison, large-cap stocks on the Russell 1000 make up about 92% of total US stocks. stock Exchange.
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To determine which companies make each list, FTSE Russell Group ranks each company on the Russell 3000 by market capitalization and separates the top third in the Russell 1000 from the bottom two thirds in the Russell 2000. Each May, the FTSE Russell Group is reassessing companies to determine if their current investment makes sense. This is because companies change in size or fold over time, and new companies can be launched that deserve to be placed in indices.
Between the annual rank day replenishment, eligible companies that go public, such as through an IPO (Initial Public Offering), and qualifying by market capitalization can be added to the Russell 2000 on a quarterly basis. For this reason, the Russell 2000 can sometimes track over 2,000 stocks.
Russell 2000 Enterprises
Because these are much smaller companies, you may be less familiar with the members of the Russell 2000. As of April 30, 2021, the top 10 Russell 2000 companies by market capitalization include:
FTSE Russell Group divides the Russell 2000 into smaller indices for investors interested in tracking the performance of particular segments of the small cap universe. These additional indexes include:
- Russell 2000 defensive
- Russell 2000 Dynamic
- Russell 2000 Growth
- Russell 2000 Value
- Russell 2000 Defensive Growth
- Russell 2000 Growth-Dynamic
- Russell 2000 Defensive Value
- Russell 2000 Value-Dynamic
Russell 2000 vs other indices
Because it tracks the performance of small-cap stocks, the Russell 2000 serves as a very different benchmark from other major indices, such as the S&P 500 or the Dow Jones Industrial Average (DJIA), which focus on much larger companies. This heavy focus on small-cap companies means the Russell 2000 could show more volatility than these indices because small businesses have more limited financial resources than larger businesses and are less equipped to deal with negative changes in the overall economy than their larger counterparts. However, with this greater potential for risk comes greater potential for exponential growth. It’s easier, after all, to double your value when your stock is worth $10 than when it’s worth $100.
Like the S&P 500, many economists regard the Russell 2000 as a reasonably accurate barometer of the US economy, especially as it relates to small businesses. Additionally, the Russell 2000 is often considered a gauge of the economy because the small businesses it tracks can be the engines of job growth, and tracking them can help economists predict where the economy is headed. American economy.
Russell 2000 vs. S&P SmallCap 600
Unlike its more famous S&P counterpart, the S&P SmallCap 600 tracks smaller companies, like the Russell 2000. However, because the S&P SmallCap 600 tracks less than a third of the number of companies in the Russell 2000, it offers much more insight. narrow. of the small cap market as a whole. For comparison, the S&P SmallCap 600 covers about 2.5% of US stocks by market capitalization, while the Russell 2000 covers about 10%.
How do you invest in the Russell 2000?
While investors could recreate the Russell 2000 by buying shares of each index company individually, it is much easier to simply invest in a Russell 2000 exchange-traded fund (ETFs) Where index fund which seeks to duplicate the performance of the index.
A number of brokerage firms offer ETFs and Russell 2000 index funds. However, you cannot buy Russell 2000 funds directly from FTSE Russell Group.
Should you invest in the Russell 2000?
The Russell 2000 Index can be a smart addition to an investment portfolio, but it’s not necessarily the right choice for everyone.
With its broad exposure, the Russell 2000 offers investors access to the high-risk, high-reward world of small-cap investments without overexposure to any particular company or sector. This can offer the best of both worlds: a smoother ride for investors while providing the opportunity for impressive gains that small-cap companies might be better positioned for. That said, small caps often experience larger price swings than larger companies, which means sophisticated investors may find that Russell 2000 funds trigger panic that large cap indices do not.
Whether or not you like the opportunity for higher risk and higher return, most investors won’t want to make Russell 2000 funds a major part of their portfolio. Even with the broad exposure of 2,000 companies, the inherent risk in this market segment means that it is not necessarily an index to bet the majority of your portfolio on.