The Russell 2000 is one of several U.S. indexes started in 1984 by the Frank Russell Company. The Russell 2000 is a subset of the Russell 3000, which aims to be a benchmark for the U.S. stock market as a whole and represents about 98% of the country’s investable equity market. The Russell 3000 includes the 3,000 largest publicly held companies by market capitalization, and the Russell 2000 tracks the smallest 2,000 among them. The average weighted market cap of the Russell 2000 company was $3.13 billion as of January 2022. Here’s how the major sectors of the Russell 2000 broke down at the end of 2021. Knowing how these sectors are weighted can help you craft your investment strategy. For instance, say you have money in a fund that tracks the Russell 2000 and want to buy more stocks. You may not want to buy shares of a publicly traded bank because the Russell 2000 is 15.8% financial stocks. Instead, you may decide to purchase shares in another sector the fund doesn’t have a large percentage of holdings in.
How the Russell 2000 Performs
Here’s a look at the total annual returns of the Russell 2000 compared to the Russell 1000 (the large-cap portion of the Russell 3000) and the S&P 500 since 2000. The Russell 2000 tends to be more volatile because small-cap stocks can change in value quickly. Volatility measures can differ, but the iShares Russell 2000 ETF beta has stayed close to 1.24 for several years (a beta of 1.0 is the market’s average risk level).
Russell 2000 vs. S&P 500
As you can see, the small-cap Russell 2000 tracks fairly closely with the large-cap S&P 500, though there are times where it moves more dramatically in one direction or another. This is because small-cap stocks are more volatile in general, so they respond more dramatically to shifts in the market. Each index will be more reliable during certain economic phases, so many investors will purchase shares of a Russell 2000 fund or ETF alongside an index fund for the S&P 500 to create a balanced portfolio.
Investing in the Russell 2000
Investors who want exposure to the breadth of the Russell 2000 can invest in a mutual fund or ETF designed to track the index. Two popular offerings include the iShares Russell 2000 ETF [NYSE: IWM] and the Vanguard Russell 2000 ETF [NYSE: VTWO].
Limitations of the Russell 2000
Some investors who want access to small-cap stocks often track the Russell 2000. Keep in mind that hundreds of companies are too small to be included in the index. The “micro-cap” category, excluded from the Russell 2000, represents the smallest companies available on the market. However, they are some of the fastest-growing stocks around. Investors who are too reliant on the Russell 2000 may lack diversification across industries and sectors. For instance, the index tends to heavily favor financials, health care, technology, and industrials but has limited exposure to companies in the communications and materials sectors.
