You have probably heard of the Dow Jones Industrial Average and the S&P 500, but another important index is the Russell 2000 Index. Of course, the stock market is complex, but indexes are simply a combination of different stocks grouped together.
These indexes are popular with investors because of their relative safety and steady returns. Although no investment is ever truly safe or risk-free, a diversified portfolio has a better chance of weathering a downturn in the economy. However, an index is much more than something to invest in as it provides an essential outlook on the economy’s overall health.
What Is the Russell 2000 Index?
The Russell 2000 Index was created in 1984 by the Frank Russell Company, which was an investment firm. They started their indexes to compare their success against overall trends in the stock market. Their indexes became popular as investors sought to put money in them.
In 2014 the London Stock Exchange Group acquired the Russell indexes and created FTSE Russell as a subsidiary of theirs. Today, the LSEG maintains the Russell 2000 Stock Index along with the other Russell indexes.
The Russell 3000 Index measures 3000 companies with the highest market cap. The companies on the Russell 3000 Index make up approximately 98% of the entire U.S. equities market.
The Russell 3000 Index consists of two segments, the Russell 1000 Index and the Russell 2000 Index. The Russell 1000 Index measures the top 1,000 businesses with the highest market cap.
As a comparison, the S&P 500 measures only the top 500 highest market cap stocks. Because the Russell 2000 index has so many stocks, it is a more thorough indicator than the S&P 500 or the Dow Jones Industrial Average.
On the other hand, the Russell 2000 Index measures 2000 businesses on the Russell 3000 Index with the smallest market cap. This essentially makes the Russell 2000 the bottom two-thirds of the Russell 3000 Index.
What Does the Russell 2000 Index Measure?
Many economists use the Russell 2000 to measure the overall health of the stock market and the economy. More specifically, an index tracks a specific segment of stocks, which, when put together, can help create a more accurate depiction of the overall economy.
The Russell 2000 is similar to the S&P SmallCap 600 in that it covers the lower end of a larger index. However, the Russell 2000 is over three times the number of companies of the S&P SmallCap 600, so it can have less volatility.
Because the Russell 2000 looks at the lower end of the stock market, it can provide a different perspective than the S&P 500 or Russell 1000. This lower segment is considered a more realistic metric than the higher-performing stocks, which could otherwise remain successful.
Although investors usually discuss indexes in the context of future investment, they also serve to look at past trends. This is why you can see Russell indexes going back to the 1970s, even though it was not created until the early 1980s.
One of the best ways to illustrate data from the Russell 2000 Index, or any index, is by using a graph. By plotting the data, you can easily compare how the index performed against individual stocks or even your investments.
What Companies Are on the Russell 2000 Index?
The Russell 2000 Index is made up of companies on both the New York Stock Exchange and the Nasdaq. These are two major stock markets that operate in the United States. One of the more unique aspects of the Russell 2000 Index is that, in addition to including stocks from the New York Stock Exchange, it can also include stocks from OTC Markets Group.
The OTC Market Group trades very low cap stocks known as pink sheets or penny stocks. The Russell 2000 Index includes these because there is a potential for OTC Markets businesses to be in the bottom 2,000 performers.
Businesses on the Russell 2000 Index include Dillard’s, Fitbit, iRobot, Crocs, Papa John’s and Winnebago, to name a few. Because the index comprises 2,000 businesses with the smallest market cap, the full list can constantly change based on how these businesses perform.
How Can You Invest in the Russell 2000 Index?
A common misconception in the stock market is that you can buy into indexes. While this is not the case, you commonly hear people talk about buying them. Because they are just a combination of stocks used to create a metric, there is nothing to invest in.
However, you can invest in the Russell 2000 by purchasing an exchange-traded fund or a mutual fund. ETFs and mutual funds mimic the moves of the overall market because they are made up of individual stocks. Although mutual funds and ETFs have these individual stocks, you only own the security and not the actual stock.
The main difference between the two is how people trade them. An ETF is traded like a stock throughout the day while the market is open. A mutual fund can be purchased after the market closes, although you can place transactions throughout the day.
You can invest by yourself or through a broker, which you can easily find online. They can help you make an informed decision and explain the best course of action. Examples of online brokers include Fidelity, TD Ameritrade and Vanguard, to name a few. However, it’s also wise to consult with a financial advisor before putting money into the stock market.
Another option that is a bit more complex is to purchase the stocks that make up the Russell 2000. Although it is possible, it would be far more complicated than just purchasing an ETF or a mutual fund — not to mention you would need to swap companies out.
