However, these are far from the only stock market indexes out there. One index that’s been gaining in popularity lately is the Russell 2000 index.
What Is the Russell 2000 Index?
The Russell 2000 index is a stock market index that tracks small-cap stocks. In particular, the index tracks the 2,000 American companies with the smallest market capitalizations on the Russell 3000 index.
The Russell 3000 index is a large stock market index that includes about 98% of the investable stocks on the United States stock market.
By separating the bottom two-thirds from the Russell 3000 index, the Russell 2000 gives investors a more detailed picture of what the smaller companies listed on the stock market are doing.
History of the Russell 2000 Index
The Russell 2000 index was created in 1984 by the Frank Russell Company. Since its inception, the index has played an important role for investors looking for opportunities in small-cap stocks. Today, the Russell 2000 is considered to be the benchmark index for the small-cap market as a whole.
Surprisingly, throughout its history, the Russell 2000 index has had a relatively close correlation to the S&P 500. This means that when the S&P 500 is experiencing gains, you can expect that the Russell 2000 index is doing the same.
As a small-cap index, swings up and down tend to be more volatile with this index than the larger benchmark indexes that track the U.S. stock market. After all, small-capitalization stocks tend to experience higher levels of volatility in the market.
Throughout its history, the Russell 2000 index has also had a strong correlation with the state of the U.S. economy. When economic conditions are booming, smaller companies are met with larger opportunities. This tends to lead to more interest in the Russell 2000, ultimately leading to gains.
Conversely, when economic conditions are concerning, smaller companies are most at risk of failure. As a result, investors tend to veer away from smaller-capitalization companies and look for more stable, blue-chip stocks or head into safe havens elsewhere in the market. When economic conditions are concerning, the Russell 2000 index generally experiences declines.
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Stocks Listed on the Russell 2000 Index
The Russell 2000 index is a small-cap index.
This means that the companies listed on the index are smaller companies that aren’t likely to be household names. In fact, you may not immediately recognize any of the companies listed, but that doesn’t mean that the index lacks opportunities for investors.
However, not all U.S. equities listed on the Russell 2000 are small-cap stocks. After all, the bottom two-thirds of the United States stock market represents quite a few companies with market capitalizations ranging from penny stocks to large-cap stocks.
To get an idea of the range of companies listed on the Russell 2000 index, just take a look at the largest and smallest companies listed.
- Largest Listed Company: The largest company on the Russell 2000 index, Myokardia, traded with a market capitalization of about $12 billion as of November 2020.
- Smallest Listed Company: The smallest company listed on the Russell 2000 index is Catabasis, which traded with a market cap of about $25 million as of November 2020.
- Median Market Capitalization: The median market cap of stocks listed on the Russell 2000 is $639 million.
Some of the largest companies listed on the Russell 2000 index include:
- Myokardia. Myokardia is a pharmaceutical company that’s focused on the development of treatments for patients with heart failure. The company traded with a market cap of around $12 billion as of November 2020.
- Mirati Therapeutics. Mirati Therapeutics is another pharmaceutical company. However, Mirati is focused on the development of cancer therapies. The stock traded with a market cap of about $11.5 billion as of November 2020.
- Penn National Gaming. Penn National Gaming operates casinos, racetracks, and other gambling-focused properties across the United States. As of November 2020, the stock traded with a market cap of about $10 billion.
- Caesars Entertainment. Yet another company centered in the world of gambling, Caesars Entertainment traded with a market cap of about $12.5 billion as of November 2020.
- Brookfield Renewable. Brookfield Renewable owns and operates a long list of renewable energy assets. As of November 2020, the stock traded with a market cap of about $11 billion.
With market caps ranging from the hundreds of millions to the tens of billions, the Russell 2000 index offers an overall view of small-cap companies, mid-cap companies, and large-cap companies, while leaving off the data found from the larger blue chips in the U.S. stock market.
How to Use the Russell 2000 Index
Investors use the Russell 2000 index in the same way that any other U.S. stock market index is used. Some of the most common ways investors take advantage of the index include:
1. Invest in Russell 2000 Index Funds
For investors looking to gain exposure to potentially big gains from the small-cap stocks in the market while balancing their investments with some large-cap companies, ETFs, mutual funds, and other funds centered around the Russell 2000 are a great way to go.
However, if you want to gain exposure to the small-cap companies listed in the stock market, it’s important that you understand the risks before doing so.
Although the Russell 2000 index has performed well historically, it has also experienced wide swings in value, including dramatic declines when U.S. economic conditions falter. So, in the words of Kenny Rogers, you’ve got to know when to hold ‘em and when to fold ‘em.
If you’re considering investing in a Russell 2000 ETF, mutual fund, or other investment based on the index, keep close tabs on U.S. economic conditions for clues as to when to make moves in and out of your positions.
Although the heavy diversification of the Russell 2000 will protect you to some extent, tough economic conditions can devastate the index’s returns.
2. Use It as a Benchmark
The Russell 2000 index is considered to be a valuable benchmark when evaluating small-cap U.S. companies.
Because the index tracks the vast majority of small-cap stocks listed on the United States stock market, it’s a great comparison tool to use when deciding which small-cap fund to invest in, or gauging whether your small-cap stock, ETF, or mutual fund is doing well relative to its peers.
3. Track the State of the United States Economy
The vast majority of U.S. companies operate in the small- to medium-sized categories. Because these are precisely the types of companies tracked by the Russell 2000 index, many economists use the index as a gauge of the state of U.S. companies.
Essentially, when the Russell 2000 index is doing well, it’s an indication that small- and medium-sized businesses across the United States are seeing revenue growth, hiring, and contributing to the country’s overall economic growth.
Conversely, when the Russell 2000 index is performing poorly, it’s an indication that small- and medium-sized companies in the United States are struggling. This creates a major red flag, suggesting that economic conditions in the United States are facing headwinds.
4. Use the Russell 2000 Index as a Performance Indicator
Technical traders often use correlations between investment vehicles and indexes like the Russell 2000 index.
Using the beta coefficient — a metric that measures correlation to the overall market — these traders are able to tell whether an asset moves in the same direction as the Russell 2000 index or the opposite direction, on average.
A beta coefficient of 1 indicates that the value of the asset will move reliably in the same direction as the Russell 2000 index, which may lead to profitable trading opportunities in some instances.
5. Use the Russell 2000 Index as a Measure of Historic Performance
Founded in 1984, the Russell 2000 index is relatively young. However, it does have more than three and a half decades of history in the U.S. equity market.
The most successful investors know that the stock market tends to move in patterns. By measuring these patterns throughout history, opportunities will arise that open the door to potential future gains.
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Criticism of the Russell 2000 Index
The Russell 2000 index is popular especially among investors who are interested in the small-cap corner of the stock market. However, the Russell 2000 index has been met with its fair share of criticism.
Some of the most common concerns surrounding the index include:
Small-Caps Are Risky
The vast majority of stocks listed on the Russell 2000 index are small-cap stocks. Small-cap stocks are often highly speculative plays that come with a high level of risk.
As a result, investments in ETFs and other funds centered around the index aren’t for everyone.
The Index Is Too Big
When investing in small-cap stocks, it’s best to make sure that you research each and every investment you make in detail. The Russell 2000 index comprises 2,000 different tickers.
As a result, it would be impossible to research every investment you’re making when you buy shares in the iShares Russell 2000 ETF or any other fund centered around the index.
Returns Are Inadequate
Throughout history, the Russell 2000 has lagged behind the overall stock market when compared to other major United States indexes like the S&P 500 or the Dow Jones Industrial Average.
This adds further validity to the idea that an investment in the Russell 2000 index isn’t for everyone.
Like the S&P 500, the Nasdaq, and the Dow Jones Industrial Average, the Russell 2000 index is a stock market index designed to track the performance of a specific group of stocks.
However, there are a few major factors that set the Russell 2000 index apart from the other major United States indexes:
- Market Cap. While there is a range of market caps listed on the Russell 2000 index, the vast majority of stocks trade in the small-cap category. This allows the index to paint a more complete picture of the U.S. economy without being colored by the performance of a handful of the largest companies.
- Size. The Russell 2000 index is made up of 2000 stocks. That’s one of the biggest widely accepted indexes on Wall Street. This fact means that the index offers a widely diversified look at the economy, including every conceivable industry and sector.
Although these factors make the Russell 2000 index a great gauge of economic conditions in the United States, they generally make the index a poor investment option that consistently underperforms when compared to the overall market.