The Russell 2000 Lets You Invest in 2,000 Small Companies at Once. Here’s How It Works

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When it comes to the stock market, big companies like Apple and Tesla tend to dominate the headlines.

But there are thousands of small businesses that can add growth and diversification to your investments for little money.

That’s what you get with the Russell 2000 Index, a low-cost fund that tracks the performance of 2,000 small-cap companies in the stock market. As part of an investment portfolio that also gives you exposure to broader indices, some financial experts recommend taking a look.

“With innovations over the decades and the growth of ETFs and index funds, lower commission costs and increased market liquidity, it has become easier to access this index, which I believe is an important part of a diversified portfolio,” said Ford Donohue, a financial analyst and director at Homrich Berg Wealth Management.

Keep reading to learn more about the Russell 2000 index, how it compares to other stock indices, and how to add it to your investment portfolio.

What is the Russell 2000 Index?

The Russell 2000 is a stock index that tracks 2,000 small-cap companies in the United States. A small-cap stock is a company with a market capitalization of less than $2 billion. The market capitalization refers to the total value of the total shares of a particular company. According to the index’s factsheet, its goal is to “provide a comprehensive and unbiased small-cap barometer.”

It is a smaller subset of the Russell 3000, which is a measure of the broad stock market.

“The Russell 2000 is a measure of the small-capitalization sector of the U.S. stock market,” said Robert Johnson, a professor of finance in the Heider College of Business at Creighton University. “It’s considered a good indicator of the whole small-cap universe. It should be noted that while it includes 2,000 stocks, given the small-cap nature of those stocks, it represents only about 10% of the market cap of the broader Russell 3000 index.

The Russell 2000 includes companies from 11 different sectors, the most common being healthcare, finance, manufacturing, consumer discretionary and technology. The top 10 companies in the index are:

AMC EntertainmentIntellia Therapeutics IncCrocs InLattice SemiconductorTenet Healthcare CorpBJ’s Wholesale ClubTetra Tech IncVaronis Systems IncRexnord CorpStaar Surgical Co

Russell 2000 Index vs. Other Market Indices

The Russell 2000 is just one of many stock indices on the market. First, let’s take a look at how the Russell 2000 compares to the larger Russell 3000 index.

The Russell 3000 is a stock index that tracks the performance of the broad stock market, which represents approximately 98% of the US stock market. Think of it as a snapshot of the stock market as a whole.

The Russell 3000 then breaks down into two smaller indices: the Russell 1000 and the Russell 2000. The Russell 1000 consists of the 1000 largest companies in the larger index and the Russell 2000 consists of the 2000 smallest.

The other index that is important to discuss is the S&P 500, which is probably the most well-known stock index. Widely considered the best indicator of the US large-cap stock market, the S&P 500 is made up of 500 of the largest publicly traded US companies.

The main difference between the Russell 2000 and the Russell 1000 or the S&P 500 is that while the Russell 2000 represents the small-cap stock market, the Russell 1000 and S&P 500 represent the large-cap stock market.

As a result, the Russell 2000 is “much more diversified,” Donohue said. “The biggest stocks don’t make up nearly as much of the index as you might see with the S&P 500 or the Russell 1000.”

In the case of the S&P 500, the top companies largely fall into the tech industry and include companies like Apple, Microsoft, Facebook, and Google. In fact, more than a third of companies in the S&P 500 are classified as information technology or communications services companies.

The Russell 2000, which does not have these large tech companies, allows for greater exposure to other sectors, including healthcare, finance, consumer goods and real estate.

For those wanting a more hands-off approach that’s proven to beat the market, check out target index funds, which offer diversification that’s right for your age and investment timeline — without having to pick or balance different funds.

How to invest in the Russell 2000 Index

Now that we’ve talked about what the Russell 2000 index is, let’s talk about how you can add it to your investment portfolio.

The easiest way to add this index to your portfolio is to invest in a Russell 2000 index fund or exchange-traded fund (ETF). Think of it like investing in all 2,000 companies in the index, but with a single security.

Pro tip

When adding the Russell 2000 to your investment portfolio, be sure to diversify with large-cap stocks and other less volatile securities.

Most major fund providers offer either a Russell 2000 index fund or ETF (or both). Examples include BlackRock’s Vanguard 2000 ETF (VTWO), Fidelity Small Cap Index Fund (FSSNX), and BlackRock’s iShares Russell 2000 Small Cap Index Fund (BDBPX).

“For those investors with a penchant for a value or growth style, one can also choose an index fund that separates the value or growth component of the small-cap index,” Johnson said.

As examples of these more specialized types of funds, Johnson refers to the Vanguard Russell 2000 Value ETF (VTWV) and the Vanguard Russell 2000 Growth ETF (VTWG), both of which have an expense ratio of 0.15%. Expense ratios are fees that investors pay annually and the lower the fees, the better for the investor.

If you’re considering adding the Russell 2000 to your portfolio, it’s important to understand some of the characteristics of small-cap stocks. As small businesses, they tend to be more volatile. They may be growing faster than many of their large-cap counterparts, but they haven’t necessarily proven themselves in the long run either.

Ideally, a diversified portfolio would include small-cap stocks from the Russell 2000, as well as more established companies from the Russell 1000 or S&P 500.

Frequently Asked Questions

Which companies are in the Russell 2000?

The Russell 2000 includes: 2000 different small cap stocks in 11 different industries. The largest companies in the index are AMC Entertainment, Intellia Therapeutics and Crocs.

What is the difference between the Russell 2000 and the Russell 1000?

The Russell 2000 and Russell 1000 both represent segments of the larger Russell 3000 index. The Russell 2000 consists of the 2,000 smallest companies in the larger index, while the Russell 1000 consists of the 1,000 largest companies.

What is the average return of the Russell 2000?

As of August 31, 2021, the Russell 2000 had a previous year return of 47.08%. Over the past 10 years, the average annual return was 13.62%

Is the Russell 2000 a good investment?

Investing in the Russell 2000 can be a good way to gain exposure to the US small cap market. It can provide diversification to a portfolio of other securities, but should not be the only investment in your portfolio.

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