Key Takeaways
- The Russell 2000 provides a snapshot of how small-cap companies’ stocks are performing.
- The index comprises 2,000 small-cap companies in the U.S.
- The FTSE Russell Group manages the Russell 2000
- The Russell 2000 is broader and more diverse compared to other small-cap indexes.
Also referred to as “Russell 2K,” Russell 2000 index is a stock market index that comprises small-cap companies. Investors and analysts use Russell 2000 as a benchmark for the financial performance of 2,000 smaller companies in the Russell 3000 index. Russell 3000 broader market index is divided into the Russell 1000 and the Russell 2000.
The Russell 2000 is a market capitalization-weighted index, and its key focus is on small-cap companies. As a subset of the Russell 3000, the Russell 2000 publicly traded stocks are roughly 10 % of the larger index market capitalization. The Russell 1000 large-cap stock represents approximately 90% of the US stock market.
What are Small Cap Stocks?
Small-cap stocks are company shares with a small market capitalization compared to larger companies. Market capitalization is measured by multiplying a company’s share price by the number of outstanding shares. Companies included in Russell 2000 have a smaller market capitalization than in larger indexes like the S&P 500 or Dow Jones. Investors and fund managers mostly use Russell 2000 as a benchmark for small-cap stocks to understand the performance of small companies stocks.
Companies with a market capitalization of between $300 million and $2 billion are considered small caps. Although these companies are more vulnerable to market volatility and economic downturns, small-cap stocks have the potential for higher growth and returns when the company expands its business. Investors can invest in small-cap stocks through mutual funds, exchange-traded funds (EFTs), or individual company stocks.
What is Traded on the Russell 2000?
As an index, the Russell 2000 itself is not traded. Instead, investors buy and sell ETFs and mutual funds that track the index’s performance. These funds help investors gain exposure to the small-cap market and its growth potential. Investors and traders can also buy and sell publicly traded stocks in the Russell 2000 index. ETFs and mutual fund investors prefer Russell 2000, as it indicates the investment opportunity that the publicly traded stock market offers as compared to those offered by other indices.
How Does a Company Get Traded on the Russell 2000?
For a company to be listed on the Russell 2000, it must meet certain eligibility criteria and undergo a screening process conducted by FTSE Russell. It must first be included in the Russell 3000, which makes up about 98% of the US stock market.
Market capitalization is used to rank these companies, the top 1000 make up the Russell 1000, and the bottom 2000 makes up the Russell 2000.
The Russell 2000 undergoes annual reconstitution to ensure its companies meet the small-cap companies’ requirements to remain in the index. Companies are added or removed depending on their current market cap. If a company’s market cap becomes too large, it will be moved to the Russell 1000 index, a benchmark to track how large-cap stops perform.
History of the Russell 2000
The Frank Russell Company created the Russell 2000 in 1984. It is part of the broader Russell indexes maintained by FTSE Russell, a London Stock Exchange Group subsidiary. The index was designed to offer investors a benchmark for the performance of small-cap stocks, which are mostly overlooked by larger-cap indexes like the S&P 500. The index is rebalanced annually, and changes are made to ensure the Russell 2000 accurately reflects the performance of small-cap stocks.
Historical Performance of the Russell 2000
The closing value of the Russell 2000 as of May 2022 was 1,949.92, which was 20.7% less than the all-time high of 2,458.86 attained in November 2021. Despite this underperformance period, the Russell 2000 small-caps stocks have been performing well over the long term. According to the FTSE Russell report, the annual return of the index has been 11% for the past ten years.
Measuring the Russell 2000
Unlike indexes like Dow Jones, which are measured based on share price; the market cap is used to measure the Russell 2000. Analysts believe that market cap is a more accurate way to reflect the performance of small-cap stocks and an accurate barometer of the US economy.
Russell 2000 uses two sub-indexes to measure the performance of different small companies’ publicly traded stocks: the Russell 2000 Growth Index and the Russell 2000 Value index.
The Russell 2000 Growth Index
The Russell 2000 Growth Index measures the performance of small-cap companies with higher price-to-value ratios and higher-than-average growth rates in revenue and earnings. Mostly, these companies reinvest their earnings into the business instead of paying dividends.
The Russell 2000 Value Index
Value Index measures the performance of the Russell 2000 companies with lower price-to-earnings ratios. These companies are often considered undervalued by the market and have higher dividend yields than growth.
How does the Russell 2000 Compare to other Stock Indexes?
Since Russell 2000 tracks the performance of small publicly traded companies, it is a different benchmark than other indexes like S&P 500 or Dow Jones Industrial Average. Though S&P 500 Index is a capitalization-weighted index, it tracks the performance of 500 large-cap companies in the US. The NASDAQ Composite Index tracks the performance of over 2,500 tech-related companies listed on the NASDAQ exchange. Dow Jones Industrial Average only monitors the performance of the US’s 30 largest publicly traded companies.
Like the Russell 2000, S&P SmallCap 600 tracks the performance of smaller companies. However, S&P Small Cap 600 tracks only one-third or less of the companies in the Russell 2000. For comparison, S&P SmallCap 600 doesn’t provide a broader understanding of the small-cap market. It only covers 2.5% of the stocks by market cap compared to the Russell 2000, which covers about 10%.
How can you Invest in the Russell 2000?
While some investors may prefer to purchase shares of specific companies in the Russell 2000 index, it is easier to invest in the index ETF or index fund that reflects the performance of the Russell 2000.
Various brokerage companies offer Russell 2000 index funds and EFTs. Investors cannot buy Russell 2000 funds directly from the FTSE Russell Group.
Diversify your portfolio beyond traditional stocks and bonds with alternative assets.
What are Some Alternatives to Investing in Stocks?
There are alternatives to investing in stocks, especially for investors who want to mitigate the risk of investing in small companies.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.
To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
Summary
The Russell 2000 index is a stock market index that tracks the performance of 2000 small public companies by market capitalization. The index is a subset of the Russell 3000 stock index, with the remaining 1000 companies forming Russell 1000 large-cap stock index. The companies in the Russell 2000 represent only 10% of the US stock market capitalization.
FTSE Russell Group manages Russell 2000 and ranks every company in the Russell 3000 based on market capitalization. The Russell indexes are reconstituted annually to determine which company gets on the list or which moves to the top third Russell index.
All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]