What is the Russell 2000?

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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 Loral Space & Communications Inc, headquartered in New York, NY since 1996. As of May 2022, the satellite communications company had a value by market capitalization of under $900M, 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).

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Tell me more…

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 February, 2022:

  • Size: The average size (by market cap) of a Russell 2000 company was $1.03B.
  • 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 is 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 a group of 30 large (“blue chip”) companies selected for representing key industries in the US economy. The group 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 narrow.
  • 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.
  • 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). When investors want to know “how the tech industry is doing,” they’d likely look to Nasdaq over the other index options.

How can mutual funds and ETFs 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 practice for mutual funds. Fund managers earn a management fee for directing investors' money into investments they hope will deliver strong returns. In order to determine if they're doing well, a fund manager needs to know if they're doing better than the stock market overall. Managers of mutual funds focused on large cap stocks might compare their performance against that of the S&P 500. For funds focused on small cap stocks, a fund manager might compare their performance against the Russell 2000.

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.

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Sign up for Robinhood and get stock on us.Certain limitations apply

New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and their options refers to $0 commissions for Robinhood Financial self-directed brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Index options are subject to a per contract fee. Keep in mind, other fees such as trading (regulatory/exchange) fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Please see Robinhood Financial’s Fee Schedule to learn more regarding brokerage transactions. Please see Robinhood Derivative’s Fee Schedule to learn more about commissions on futures transactions.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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