Russell 2000 Index Definition Components How It Works

Russell 2000 Index Definition

The Frank Russell Company introduced the Russell 2000 index in the year 1984. It is regulated by the Financial Times Stock Exchange (FTSE) Group, London. The index contains two thousand forty best small-cap stocksSmall-cap StocksSmall cap stocks are offered by relatively small companies that are publicly listed. A small cap company has a low market capitalization ranging between $300 million to $2 billion. Small cap investors have a high-risk, high-reward approach.read more of the US. Therefore, the growth potential is considerably high compared to large-cap stocksLarge-cap StocksLarge-cap stocks refer to stocks of large companies with value, also known as the market capitalization of 10 billion dollars or more, and these stocks are less risky than others and are stable. They also pay a good dividend and return, and it is the safest option to invest.read more.

Key Takeaways

The Russell 2000 index is a stock market capitalization-weighted indicator that tracks the performance of two thousand forty US small-cap domestic companies. It was initiated by the Frank Russell Company in the year 1984 and is controlled under the regulations of the FTSE Group, London. The Russell 2000 has been adopted as a benchmark for evaluating all the other small-cap mutual funds’ performance. It comprises the lowest two thousand forty small-cap stocks listed under the Russell 3000 index.

Russell 2000 Explained

The Russell 2000 index is a stock market capitalization-weighted indicator. When we think of high income from shares, the first thing that strikes our mind is small-cap stock investments. Russell 2000 is a blend of more than two thousand such stocks. This index updates quarterly to include new competent small-cap stocks. Also, the non-competent ones are removed from the list every year. The key features of Russell 2000 are as follows.

Small-cap stocks refer to stocks of relatively small companies that have value. They are valued between three hundred million US dollars and two billion US dollars. Investors who look for a high return-high risk choose small-cap stocks. These stocks are the riskiest during an economic downturn. They are more likely to fail during the recession as they do not have a large business to survive.The index comprises companies like 1-800 Flowers Com, 1st Source Corp, AH Belo Corp, and AAON Inc. The Russell 2000 represents US companies predominantly involved in domestic trade activities. However, it eliminates below $1 stocks, limited partnership entities, non-US companies, and royalty trusts.

To understand the different components of Russell 2000, take a look at the following pie diagram. It depicts the GICS Sector weightings of the Russell 2000 index as of 31st December 2020.

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The Russell Group is constantly improving the components of the Russell 2000 index. In the last five years, substantial interest has been shown in the healthcare sector. The index incorporated 21.11% of its stocks from this industry by the end of 2020. Two other significant sectors include the industrial and financial companies with 15.35% and 15.32% of stocks, respectively. Information technology, consumer discretionaryConsumer DiscretionaryConsumer discretionary refers to goods and services mostly acquired using discretionary income as they are optional in people’s lives such as designer clothes or luxury cars.read more, and real estate sectors are also major components of the index.Although Russell 2000 discontinued the telecom sector in 2018, the lowest share is allocated to the energy sector at 2.09%. Russell’s value changes every day, as it is a stock indexStock IndexThe stock index, which is also known as the stock market index, is a tool used to determine the performance of shares/securities in the market and to calculate the return on the stock of their investment investors use it to have knowledge about the performance of investments and access the total value they possess.read more representing the market value of two thousand forty small-cap US companies. When the index entered the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more in July 1987, it closed at $170.81. However, on 4th April 2021, it was valued at $2253.90. In 35 years, the index value has been appraised by 13 times.

The following Bloomberg graph shows Russell’s peaks and valleys from 2017 to 2021.

The graph shows Russell hitting the highest in the first quarter of 2021. Also, at the end of 2020, there was a sharp fall. The reason behind fluctuations is the changing composition of this index. Since 2020, Russell has been concentrating more on the healthcare sector. Post-Covid outbreak, the health sector is on the rise.

Does the Russell 2000 Index Include S&P 500?

No, both these groups of stocks belong to different categories. The Russell list purely tracks the small-cap stocks, whereas the S&P 500 index tracks the performance of large-cap stocks.

Russell 2000 and S&P 500 are drastically different despite being market capitalization-weighted lists.

The Russell 2000 index is seen as a subgroup of the two thousand forty small-cap stocks from the bottom of the Russell 3000 index list. In contrast, the S&P 500 has no sequence; it blends five hundred different equities belonging to the best large-cap companies.

The Russell 2000 is a small-cap benchmark; in contrast, the S&P 500 is a large-cap benchmark. Russell has invested in the health sector significantly (i.e., 21.11%), whereas S&P 500 concentrates on information technology and financial industries.

In the bull marketBull MarketA bull market occurs when many stock prices rise 20% from a recent low, with the price climb spanning for an extended period.read more, the Russell 2000 is always a better option over S&P 500. Its growth potential is higher. But when it comes to volatile market conditions or bear markets, S&P 500 is considered more reliable. S&P 500 is reliable because it comprises stocks belonging to the top corporate brands.

Investors looking for high returns with a moderate risk prefer Russell. Those looking for low risk and reasonable returns prefer S&P 500.

Russell 2000 Index ETF

An exchange-traded fund is the best method to invest in Russell. An ETF is a publicly traded fund that tracks the performance of commodities, indexes, sectors, or assets. Thus, the Russell ETF is an indicator of Russell’s performance in the open market. Given below are the two popular ETFsETFsAn exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange.read more of this group:

iShares Russell 2000 ETF (IWM): This exchange-traded fund comprises 90% of the Russell 2000 securities and its depository receipts. The remaining 10% include assets from cash, cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read more, options, futures, and swap contracts.Vanguard’s Russell 2000 ETF (VTWO): The composition of the VTWO closely replicates Russell 2000.

It is important to note that an investor usually has to pay high fees for investing in any Russell 2000 ETFs. However, the expense ratioExpense RatioMutual Fund Expense Ratio is the percentage amount charged by the fund manager in exchange of the services provided. The charges include management expense, advisory fees, travel cost, consultancy charges, however, brokerage cost for trading in excluded.read more is comparatively more for the IWM since it has better liquidity.

According to Morningstar’s report, a couple of other small-cap funds promise higher returns than Russell. The CRSP US Small Cap provided 12.21 %, MSCI US Small Cap yielded 12.15%, and S&P SmallCap 600 gave 11.86% returns. In comparison, Russell 2000 managed only an average of 11.13 % returns in the last ten years. The Russell 2000 index fund is comparatively more volatile than the other members of the Russell index family.