What is the Russell 3000 Index?

The Russell 3000 is like fishing with a wide net...

When you fish with a wide net, you’ll cover a larger area of water and are more likely to catch more fish. Likewise, the Russell 3000 covers a more substantial portion of the stock market than other indexes, such as the Dow Jones Industrial Average, which tracks only 30 companies or the Nasdaq Composite Index, which covers mostly tech stocks.

The Russell 3000 Index is a benchmark tracking the performance of the 3,000 publicly traded U.S. companies with the highest market capitalization.

First compiled in 1984 by the Frank Russell Company, the Russell 3000 Index aims to represent all U.S. stocks and contains about 98% of tradable equities. The Russell 3000 is the combination of two other Russell indices:

• Russell 1000 Index: A list of the top 1,000 U.S. stocks by market cap.
• Russell 2000 Index: A list made of the next 2,000 U.S. stocks by market cap.

By covering a broad range of U.S. equities, the Russell 3000 is the basis for additional, more specialized Russell indices, such as:

• Russell Top 200 Index: The largest 200 US stocks by market cap. The average market cap of stocks in the Russell Top 200 was approximately $570B as of September 30, 2022. Some of the top stocks in the Russell Top 200 include Apple, Microsoft, and Amazon.
• Russell Midcap Index: The next largest 800 companies by market cap after the ones from the Russell Top 200 index. The average market cap of stocks in the Russell Midcap was nearly $20B as of September 30, 2022. Some of the top stocks in the Russell Midcap Index include Synopsys, Cadence Design Systems, and O’Reilly Auto Parts.

The Frank Russell Company is now part of the FTSE Russell, a wholly owned subsidiary of the London Stock Exchange Group. FTSE Russell continuously updates the Russell 3000 in three ways:

• Every June, FTSE reevaluates each eligible US stock and reconstitutes the Russell 3000 index in its entirety.
• Every quarter, FTSE checks initial public offerings — the first time shares of a private company are offered on a public stock exchange to investors — within the quarter for eligibility in the Russell 3000 index.
• As needed, the FTSE makes adjustments to the Russell 3000 due to corporate events, such as a company acquiring another company or a company merging with another company.

The Russell 3000 index contains 3,000 publicly traded U.S. companies or about 96% of the U.S. equity market. As of September 30, 2022, the top 10 companies by market capitalization in the Russell 3000 Index were:

1. Apple
2. Microsoft
3. Amazon
4. Tesla
5. Alphabet (Google) Class A shares
6. Alphabet (Google) Class C shares
7. Berkshire Hathaway
8. Unitedhealth
9. Johnson & Johnson
10. Exxon Mobil

In that period, the average market capitalization of a company in the Russell 3000 was about $400B. The median market capitalization of the Russell 3000 was about $1.89B. Apple’s stock topped the Russell with a total market capitalization of more than $2.2T.

As of September 30, 2022, the Russell 3000 included stocks in a broad range of industries, including technology, financial services, health care, consumer discretionary, and energy.

Here’s the full list of the Russell 3000 companies as of June 24, 2022.

The principal difference between the Russell 3000 and the S&P 500 is that the S&P 500 leans toward larger cap U.S. stocks. The S&P 500 also uses a smaller sample of 500 companies, compared to 3000 in the Russell 3000.

Another difference is that the S&P 500 goes through rebalancing every quarter, while the Russell 3000 goes through rebalancing once a year in June. While FTSE Russell checks for newly listed U.S. stocks every quarter, the company may not necessarily rebalance the Russell 3000 every quarter.

Does the Russell 3000 include the S&P 500?

Yes, the Russell 3000 includes the S&P 500. As of September 30, 2022, the minimum market capitalization of a US company in the S&P 500 is at least $14.6B. By including the next 2,500 U.S. stocks by market capitalization, the set of Russell 3000 companies includes those companies from the S&P 500.

Here’s an overview of the differences between the Russell 3000 and other commonly used indices, such as the Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000.

• Dow Jones Industrial Average: The Russell 3000 encompasses a much larger set of companies than the 30-company set from the Dow. Also, Russell 3000 companies are selected based solely on market capitalization. Dow companies are selected on other factors, such as strong reputation and demonstrated sustained growth.
• Nasdaq Composite: Unlike the Nasdaq Composite, the Russell 3000 focuses on sectors beyond tech. While some of the Russell 3000 companies are in the tech sector, many are not. Another difference between the two indices is that the Nasdaq Composite only considers companies listed on the Nasdaq stock exchange.
• Russell 2000: The Russell 3000 is a broader index than the Russell 2000 because the Russell 3000 includes an additional 1,000 large cap U.S. companies.

The Russell 3000 is formed by 1,000 large cap stocks from the Russell 1000 (33.33% of all Russell 3000 companies) and 2,000 small cap stocks from the Russell 2000 (the remaining 66.67% of all Russell 3000 companies).

What are the historical returns?

Let’s review the annual returns of the Russell 3000 from 2015 to 2021.

• | Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
• | Annual Return of Russell 3000 | 0.48% | 12.74% | 21.13% | -5.24% | 31.02% | 20.89% | 25.66% |

The past return performance of the Russell 3000 doesn’t guarantee similar results in the future. An index cannot be directly invested in and the returns do not include the effect of taxes or expenses.

One of the main limitations of the Russell 3000 index is its balancing act between representing the broad U.S. stock market and choosing a sample of practically available stocks. Before the Russell 3000’s launch in 1984, the existing index included every publicly traded U.S. stock. Through its research, the Frank Russell Company (now FTSE Russell) determined that large and institutional investors held approximately 98% of US stocks.

About 2% of U.S. stocks are too small and/or can’t be traded quickly due to a shortage of interested buyers. While the Russell 3000 index seeks to represent the US stock market as a whole, it doesn’t include every single stock.

In an effort to cover more than 98% of the US stock market, FTSE Russell launched the Russell 3000E on June 1, 2005. The Russell 3000E tracks about 4,000 of the largest U.S. stocks, including those from the Russell 3000 and the Russell Microcap — an index covering the next largest 1,000 U.S. stocks by market cap after those from the Russell 3000.

A second limitation of the Russell 3000 is the potentially high cost for an investor to replicate this index. FTSE Russell revises the index on a quarterly and annual basis, and as needed due to corporate events, such as mergers and acquisitions. The more frequent the updates, the higher the potential trading fees. That being said, an investor could easily get around this by investing in a Russell 3000 index fund or exchange-traded fund (ETF)

A third limitation of the Russell 3000 is that it may not provide enough investment diversification — a risk management strategy that involves splitting up your investment portfolio into different types of assets that behave differently. While the index represents 3,000 stocks, it’s still representing just one asset class: domestic stocks.

It isn’t possible to invest directly in a stock index, such as the Russell 3000 or the S&P 500. If you would like to invest in a portfolio similar to that of a stock index, you would have to invest in an index fund or exchange traded fund tracking the performance of your target stock index. When investing in an index fund or exchange traded fund, you should consider several factors, including:

• Investment objective: What is your investment objective?
• Holding period: How long are you willing to hold your investment?
• Tolerance to risk: What is a potential loss that you can sustain?
• Target investment return: What is your desired investment return?
• Budget for applicable investment fees: How much are you willing to pay in fees, if any?
• Tax implications of investments: Are there any tax implications that you need to keep in mind?

Given that there are several factors to consider in an investment, it’s a good idea to consult a financial advisor or the prospectus (a document which details objectives, cost/fees) when deciding on which investment to make.