The Russell 2000 Index is a stock market index that measures the performance of approximately 2,000 of the smallest-capitalization U.S. corporations in the Russell 3000 Index, which is made up of 3,000 of the largest American stocks. It is a useful alternative to indexes like the S&P 500, which tracks the shares of the 500 largest U.S. corporations, and the Dow Jones Industrial Average, which tracks the shares of the nation’s 30 largest industrial corporations.
The term “small capitalization” (or “small cap”) is used to identify shares that have a market capitalization between $300 million and $2 billion. Market capitalization means the total value of a company’s outstanding shares. It’s calculated by multiplying the total number of shares issued by the market price of a single share.
By comparison, mid-capitalization (or mid cap) stocks have a market capitalization ranging from $2 billion to $10 billion, while large capitalization (or large cap) stocks surpass the $10 billion mark. Companies that fall below the $300 million market capitalization range are known as micro-capitalization (or micro cap) companies.
The Russell 2000 Index Explained
The Russell 2000 Index is a stock market index built exclusively of small-capitalization U.S. companies. It is an offshoot of a broader, market-wide index called the Russell 3000. While the Russell 3000 index tracks the 3,000 largest publicly traded companies in the United States, which together make up almost all of the trading volume on U.S. stock markets, this index is then broken down into two sub-sections. The Russell 1000 tracks the 1,000 largest stocks in its parent index and the Russell 2000, which tracks the 2,000 smallest.
Traders use the Russell 2000 index for several different reasons. Perhaps most significantly it offers valuable insight into the small-capitalization market. Investors can use it to see how smaller companies are doing overall, and often measure the performance of mutual funds and ETFs against the Russell 2000 Index. For example, an investor might assess a small-capitalization mutual fund by comparing its results to the Russell 2000 over time.
This is particularly valuable given that small-capitalization stocks tend to have more volatility than larger companies do. Their smaller size makes them vulnerable to larger proportional shifts in value. The Russell 2000 Index, then, can give investors a market-wide perspective on this more volatile asset class.
There are a couple of variations of the Russell 2000 that attract investors. One is the Russell 2000 Growth Index and another is the Russell 2000 Value Index. The former tracks companies with higher price-to-book ratios and higher growth prospects; the latter tracks companies with lower price-to-book ratios and lower growth prospects.
The Russell 2000 vs. Benchmark Indexes
The Russell 2000 is increasingly valuable as an alternative perspective on the stock market.
The two most well-known benchmark indexes on the stock market, the S&P 500 and the Dow Jones Industrial Average, are comprised of the largest stocks traded in their respective categories. This creates a bias towards the performance of the largest companies in the market. By time of writing this had become so skewed that the S&P 500 derived a fifth of its value alone from five companies (Apple, Facebook, Microsoft, Alphabet and Amazon).
This not only concentrates the index on a small number of corporations, but it also creates a market bias towards a particular sector, Big Tech.
By spreading its index across thousands small-capitalization companies, the Russell 2000 Index has created an index less prone to “sector capture,” more diverse in its inputs and significantly more domestic in its performance. This index measures exclusively U.S. companies and, as they are small-capitalization companies, ones more likely to do all or the majority of their business in the U.S.. This approach, of course, comes with its own set of biases, most particularly that the index intentionally chooses not to measure the stock market’s biggest companies.
The Bottom Line
The Russell 2000 Index is a stock market index that measures 2,000 small-capitalization companies based in the United States. It is one of the most common alternatives to the S&P 500 and Dow Jones Industrial Average, both of which track the share prices of the nation’s largest corporations. The most common way to invest in the Russell 2000 Index is to purchase a mutual fund or an ETF that has tied itself to the performance of this index. These are common products and very popular with investors.
Tips for Investing
Financial advisors can offer valuable insights as you decide whether investing in small-capitalization shares is a good fit for your financial plans and, if so, in what proportion you should do so. Finding a financial advisor doesn’t have to be hard. SmartAsset’s matching tool can connect you with one in your area in minutes. If you’re ready, get started now.
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