As an investor seeking the best platforms and opportunities to invest in, you must know how important a stock index is. The Russell 2000 is an example of an index, which provides essential information on a group of stocks rather than focusing on just one.
You may have come across the index, Russell 2000, and want to know why this is an important index to pay attention to. Here’s all you need to know about this index as an investor.
What is the Russell 2000?
The Russell 2000 is an index used to measure the performance of American companies with the smallest capitalization. As the name implies, this index keeps track of 2000 companies listed on the U.S. stock market.
The main marker that identifies these companies is that they all have small market capitalization. Many investors use indices like the Russell 2000 as a sort of gauge in measuring the performance of the stock market in specific industries.
How Does the Russell 2000 Work?
The Russell 2000 index is weighted against the market cap and changes relative to the total market capitalization. Quick note: the Russell 2000 should not be confused with the Russell 3000 or 1000 indices.
While these indices bear the same first name, they do not provide the same information. The Russell 3000 provides information on the performance of the 3,000 largest U.S. traded stocks.
Whereas, the Russell 2000 and 1000 are components of the Russell 3000. The Russell 2000 focuses on the smallest cap companies on the US stock market and the Russell 1000 focuses on the top-performing companies on the US Stock market.
History of Russell 2000
The Russell 2000 index was created in 1984 by the Frank Russell Company, headquartered in London. Since its creation, it has quickly become a very popular indexing tool for many investors and mutual funds.
What Companies are in the Russell 2000?
Because there are over 2000 companies on this index, it would be highly impossible to provide the entire list of stocks in this article. But, there are great resources online where you can find information on these stocks as well as a full list of companies.
However here are some of the names you may be familiar with that are under the Russell 2000 index:
- Plug Power (PLUG)
- Novavax (NVAX)
- Penn National Gaming (PENN)
- Caesars Entertainment (CZR)
- Sunrun (RUN)
- Cliffs Natural Resources (CLF)
- AMC Entertainment (AMC)
- Appian (APPN)
- Darling Ingredients (DAR)
- Mirati Therapeutics MRTX)
- Bridgebio Pharma (BBIO)
Companies that are a part of the Russell 2000 must possess specific characteristics, including some of the following:
- Must be traded on the U.S. exchanges.
- A total market capitalization of no less than $30 million.
- More than an absolute 5% of shares available.
- No royalty trusts, LLCs, limited partnerships, closed-end investment, or blank-check companies.
What Is the Average Return of the Russell 2000?
The Russell 2000 index has a great track record. It has provided an average of 19.2% returns trumping both the S&P 500 and the Dow Jones Industrial Average.
November 2020, we saw the Russell 2000 index hit 18.3%, with a substantial gap over other indices.
Why Do Mutual Funds Use the Russell 2000?
Many mutual funds use the Russell 2000 as a benchmark and a point of comparison, especially for the ones that are focused on small-cap funds. The Russell 2000 index accounts for two-thirds of the companies on the US stock market and it provides significant data.
This data is indispensable in analyzing the market and also in making critical investment decisions. Managers of mutual funds are expected to make the best possible decision when it comes to where the investors’ money goes.
The Russell 2000 provides a way for them to know if they are doing better than or worse compared to the overall stock market.
Is the Russell 2000 Overvalued?
There is still a debate on how stock indices should be valued and as such, arises the concern of the overvalue of the Russell 2000. This is because the value is often only a combination of the companies doing well in the stock market, removing the negatively performing ones from the equation.
The real bone of contention has been in the method used in evaluating the value of the Russell 2000 and other small-cap indices. Still, the market has shown that the Russell 2000 continues to outperform other indices and expectations.
How Can I Invest in the Russell 2000?
It’s highly unlikely that anyone can invest directly into the Russell 2000 index. However, there are two ways you can get around this.
You can buy the individual stocks that the Russell 2000 tracks or purchase ETFs that track them as a whole.
Purchasing Individual Stocks
One way to invest in the Russell 2000 index is to buy the stocks that the index tracks in individual trades. Since it tracks 2,000 stocks, you would need to purchase many stocks one at a time and pair them as the Russell 2000 does.
But this approach would be time-consuming, stressful, and incur a lot of trading fees. It would definitely not be the best-advised method of investing.
Purchasing ETFs
The second way to invest in the Russell 2000 index is to invest in ETFs. These are exchange-traded funds that can be traded on the stock exchange.
You can buy an ETF that has a collection of stocks, commodities, and assets, such as the ones found in the Russell 2000 index. The Russell 2000 ETFs also give you the benefit of diversification without the issues of high trading fees.
Russell 2000 & Its Comparables
The Russell 2000 ETFs have other indices that it can be compared with, but they are not the same. Here are some of the top competing indices with the Russell 2000.
NASDAQ
The NASDAQ is an acronym that stands for the “National Association of Securities Dealers Automated Quotations.” The Nasdaq also has an index that tracks more than 3,000 stocks listed on the Nasdaq exchange.
Many of these stocks belong to some of the foremost tech giants in the world. The key difference here is that the Russell 2000 index focuses on companies with small capitalization and is much broader.
Whereas, the Nasdaq tracks some of the key tech giants in the market.
Russell 3000
As mentioned before, the Russell 3000 is a superset of the Russell 2000. The Russell 3000 tracks the performance of 3,000 U.S. traded stocks, which accounts for around 98% of all U.S stocks.
The Russell 2000, on the other hand, tracks the lower two-third of those stocks.
S&P 500
The Standard and Poor’s 500 is an equity index comprised of 500 large-capitalization companies listed on U.S. exchanges. The S&P 500 is one of the most popular stock indexes and is often used to measure the broader aspects of the U.S. stock market, unlike the Russell 2000, which focuses on small-cap stocks.
Advantages of the Russell 2000
There is a lot of reasons why you should consider investing in the Russell 2000 index as it presents several advantages, including:
- A much broader opportunity scale on the entire market rather than focusing on certain sectors alone.
- The index continues to outperform the larger indices even in periods where interest rates plummet.
- The potential return on investment is far higher for investors than what you would get anywhere else.
- The Russell 2000 index also has a good growth trajectory.
Disadvantages of the Russell 2000
There are however a few disadvantages to consider before investing with the Russell 2000.
- There are a lot of high fees that come with investing with the Russell 2000.
- It is more volatile than most large-cap stocks on the market.
- The index may provide higher returns but comes with greater risks.
Should You Invest in the Russell 2000?
With all we’ve seen about the Russell 2000 index, it presents a great opportunity for investors to make great returns on their investment. Deciding to go down this path is a choice only you can make.
But you can always take advantage of the services of financial advisors to see which decision will be best for you.