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What is the Russell 2000?

Jack and Nick Author Pic
Jack Kramer & Nick MartellAugust 26, 2019
Forbes 30 Under 30 in media, appeared on CBS, Cheddar. Registered representatives of Robinhood Financial LLC.
definition

The Russell 2000 is an index that captures the stock performance of 2,000 of the smaller publicly traded US companies.

🤔 Understanding the Russell 2000

(Any) size matters. And the Russell 2000 cares about “small.” Since 1984, this stock market index tracks the stock performance of 2,000 of smaller publicly traded US-based companies. It’s weighted by market capitalization, focusing on “small cap” companies (typically $300M to $2B in market value) that happen to make up over 90% of the companies in the US stock market. As a result, the Russell 2000 serves as a snapshot of what’s happening to smaller companies’ stocks – And it’s typically used as a benchmark for small cap-focused mutual funds to compare their performance to that of the market in general.

example

The Russell 2000 stock index is made up of some of the smallest publicly traded US companies — One randomly chosen example is Applied Optoelectronics, based in Sugar Land, TX since 1997. As of May 2019, the small communications company had a value by market capitalization of under $200M, a reflection of a typical Russell 2000 stock.

Takeaway

The Russell 2000 is your snapshot into how small companies are doing…

This index is not only focused on a particular size of company (small market cap valuations, typically under $2B), but it’s also large in its scope compared to other indexes (the Dow tracks 30 companies and the S&P 500 includes 500). Given this specificity and breadth, the Russell 2000 can highlight how smaller company performances compare to the broader market (vs. the S&P 500 index) or even the tech industry (vs. the Nasdaq Composite index). Russell2000 Illustration-12-12

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Some background on the Russell 2000
What companies are in the Russell 2000
Russell 2000 vs. the Dow vs. S&P 500 vs. Nasdaq Composite
How mutual funds use the Russell 2000

Some background on the Russell 2000

The year was 1984. That’s when the Russell 2000 came into existence courtesy of the Frank Russell Company. Those 2000 stocks within the index were selected from an even larger index, the Russell 3000 — So the Russell 2000 is actually the 2,000 smallest companies within the Russell 3000. Even though the Russell 2000 makes up the majority of the Russell 3000, by market cap value its companies represent less than 10% of the larger Russell 3000 index.

Later in the 1980s, the company introduced additional small cap focused indexes to provide more perspective on general market movements, like the Russell 1000. Today, the index is maintained by FTSE Russell, which is a subsidiary of the London Stock Exchange.

What companies are in the Russell 2000

The intention of the Russell 2000 was to isolate and focus on smaller publicly traded companies — They make up the vast majority of publicly traded US stocks: 98% of them. As the Russell Index itself likes to put it, the index is “designed to offer a comprehensive and objective representation of the US small cap market.” In general, given the size of the Russell 2000 (again, 2,000 stocks) and its focus on smaller companies, many of the companies included are likely less well known by investors and by regular people.

Here are some highlights of what companies are included in the Russell 2000 (aka, its components) as of May 31, 2019:

  • Popular: The three Russell 2000 stocks with the greatest amount held by investors were Etsy, Five Below, and Planet Fitness.
  • Size: The average size (by market cap) of a Russell 2000 company was $2.4B.
  • Industry: The top most represented sectors in the index (from highest to lowest) were financial services, healthcare, consumer discretionary, producer durables, and technology.

Russell 2000 vs. the Dow vs. S&P 500 vs. Nasdaq Composite

The “Core 4.” This combo of indexes are among the most common used by investors, referenced on TV, or simply discussed when anyone wants to know what’s up with the markets. We’ve just covered the small cap-focused Russell 2000, but each of the other three has key distinctions you should nail down when you’re dropping the terms:

  • Dow Jones Industrial Average (“the Dow”) is an elite club of 30 large (“blue chip”) companies selected for representing key industries in the US economy. The exclusive crew is intended to reflect the stock market in general, but it’s not necessarily the same as what happens to the whole market because it’s so selective. As of May 2019, the Dow was at around 25,000 points — That number is calculated using the price-weighted index method, and based on its 30 stocks, with the weighting determined by stock price. So the company with the highest dollar stock affects the index the most.
  • The S&P 500 covers 500 of the largest companies publicly traded as often referenced by investors to answer the question “what’s happening in the market?” Given its scope (500 companies) and their size (mainly large cap), these stocks are considered to best reflect the movements of the overall market out of all of the 4 major indexes. As of May 2019, the S&P 500 was at around 2,800 points, which is weighted by market capitalization (unlike the Dow) — That strategy of weighting by market cap makes more sense because market capitalization accounts for both the stock price and the number of outstanding shares in the market.
  • The Nasdaq Composite is focused on the tech industry, unlike the Dow and the S&P 500, which are more general. It tracks 3,000 stocks that have listed on the Nasdaq stock exchange, the 2nd largest exchange in the world (New York Stock Exchange is #1). This electronic trading exchange has no exchange floor and happens to attract tech companies for their initial public offerings and list their shares, so the index has a high presence of tech. When investors want to know “how the tech industry is doing,” they’d likely look to Nasdaq over the other index options. FYI, like the S&P 500, it’s also weighted by market cap, and as of May 2019, it was hovering at around 7,800 points.

How mutual funds use the Russell 2000

To know how you’re doing at anything, you need a point of comparison — The Russell 2000 is exactly that for plenty of small cap mutual funds. Mutual funds focused on small cap funds need to gauge their performance, so they may use the Russell 2000 as a point of comparison since it’s representative of general movements of the entire universe of small cap public company stocks.

Benchmarking is how you measure your progress, and it’s a common technique for mutual funds. Fund managers earn a management fee to direct investor money into investments they hope will outperform the market. So in order to determine if she’s out-performing, a fund manager needs to know what the market is doing. For managers of mutual funds focused on large cap stocks, they’ll typically use the S&P 500 as their benchmark. For funds focused on small cap stocks, they’ll typically use the Russell 2000 as their benchmark index of choice.

Disclosure: Stocks referenced in this article were chosen from our list of the 100 most popular stocks on the Robinhood app.

It is not possible to invest directly in a market index. Indices are not subject to any fees or expenses.

Please be advised that by clicking a third-party URL or hyperlink, you’ll be accessing a third-party website. Robinhood Financial LLC is not implying that any monitoring is being done by Robinhood Financial LLC of any information contained on the third-party website. Robinhood Financial LLC is not responsible for the information contained on the third-party website or your use of or inability to use such site. Nor do we guarantee their accuracy and completeness. 20190617-875554-2639825

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