What is the Russell 2000 Stock Market Index?

While the Dow Jones Industrial Average and the S&P 500 get most of the headline attention, it’s important for investors to understand that there are many different stock indexes. One of the most popular indexes that doesn’t invest in large companies is known as the Russell 2000, and it is widely considered the benchmark for smaller U.S. stocks.

With that in mind, here’s a rundown of what investors should know about the Russell 2000 Index, how it works, and whether it could be a smart investment choice for you.

What is the Russell 2000 Index?

The Russell 2000 Index is the most widely used index of small-cap stocks -- stocks with a relatively small market capitalization. There are no hard-and-fast rules as to when a stock is a small cap. The key point to know here is that there’s a broad market index known as the Russell 3000 Index, which is divided into two smaller ones: the Russell 1000, which accounts for the 1,000 largest companies, and the Russell 2000, which accounts for the remaining two-thirds.

The median market cap of the stocks in the Russell 2000 Index is $2.3 billion, but there is quite a wide range, as you might expect from a collection of 2,000 companies. The largest company in the index has a market cap of $9 billion, while the smaller ones have market caps in the $200 million ballpark.

The Russell 2000 is a market capitalization-weighted index, as are the majority of popular stock indexes (the Dow Jones Industrial Average being the main exception). This means that the 2,000 companies that make up the index don't contribute equally to its performance. Larger companies have a proportionally higher impact than smaller ones.

What companies are in the Russell 2000?

It wouldn’t be practical to list all 2,000 companies here. Instead, here are 10 of the largest Russell 2000 companies, just to give you an idea of the types of companies that make up the index.

1. Teladoc Health (NYSE:TDOC)
2. Novocure (NASDAQ:NVCR)
3. Generac (NYSE:GNRC)
4. Lumentum (NASDAQ:LITE)
5. Trex (NYSE:TREX)
6. Amedisys (NASDAQ:AMED)
7. Portland General Electric (NYSE:POR)
8. Haemonetics (NYSE:HAE)
9. First Industrial Realty Trust (NYSE:FR)
10. Deckers Outdoor Corp (NYSE:DECK)

Data source: FTSE Russell. Top 10 holdings as of Jan. 31, 2020.

The takeaway is that while these aren't exactly tiny enterprises, they aren't giant companies, either. That's the key difference between the Russell 2000 and the "headline" indexes.

How to invest in the Russell 2000

If you want to invest in the Russell 2000 Index, you don’t need to buy all 2,000 stocks. You can invest in the index rather easily through a mutual fund or exchange-traded fund (ETF) designed to passively track it.

One good example is the Vanguard Russell 2000 ETF (NASDAQ:VTWO), which invests in all the stocks in the index according to their relative weights. With a small (0.10%) expense ratio, fees are low, so the fund’s long-term performance should be virtually identical to that of the index itself.

Other Major Stock Indexes

How is the Russell 2000 different from other major stock indexes?

There are many important stock indexes, and all focus on a different basket of stocks. Some of the most common:

• Dow Jones Industrial Average: The best-known stock index in the U.S., "the Dow" is composed of 30 of the largest public companies. Unlike most other indexes, the Dow is price-weighted, meaning that stocks with higher share prices contribute more to the index's performance.
• S&P 500: 500 large public U.S. companies. Note that they aren't necessarily the largest 500.
• S&P MidCap 400: 400 public U.S. companies with market capitalizations between $2.4 billion and $8.2 billion.
• S&P SmallCap 600: 600 public U.S. companies with market capitalizations between $600 million and $2.4 billion. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 are collectively known as the S&P Composite 1500 Index.
• Nasdaq Composite: An index of all the companies traded on the NASDAQ exchange.
• Nasdaq 100: An index of 100 of the largest Nasdaq-listed companies, widely considered a barometer for how tech stocks are performing.
• Russell 1000: The 1,000 largest public U.S. companies. The Russell 1000 and Russell 2000 are collectively known as the Russell 3000, which is regarded as one of the best barometers for the overall U.S. stock market's performance.

So what makes the Russell 2000 different from the rest?

• Smaller and more volatile companies: The stocks in the Russell 2000 are of smaller companies than those in the “headline” indexes like the S&P 500. Many of them are newer growth companies and so tend to be more volatile than their larger counterparts. In other words, don’t be surprised if the Russell 2000 experiences more dramatic swings than the large-cap indexes.
• Higher growth potential: While they tend to be more volatile, smaller-cap stocks typically have much more growth potential than larger companies. Think of it this way: It would be far more difficult for Apple (NASDAQ:AAPL) to double in size than it would be for a newer tech company with a $1 billion market cap. So while their price swings tend to be more dramatic, small-cap stocks tend to outperform large caps over long periods.
• More diversified: Because it focuses on smaller companies and contains 2,000 of them, the Russell 2000 is more diversified than other popular indexes like the S&P 500. For one thing, it is less top-heavy, not depending as much on the performance of just a few large companies. The median market cap of a Russell 2000 stock is $2.3 billion as of February 2020, and the largest company in the index has a market cap of less than four times this amount. Meanwhile, the median market cap of an S&P 500 company is $127 billion as of February 2020, but the largest company in the index (Apple) has a market cap of more than 10 times this size.

In a nutshell, the Russell 2000 is composed of smaller and more volatile stocks than those in large-cap indexes, but the large number of companies in the index helps mitigate the risk, since it's less reliant on any particular stock's performance.

Is investing in the Russell 2000 Index right for you?

Investing in the Russell 2000 is a great way to get exposure to the exciting world of small-cap investing without relying too heavily on the performance of any single company. The vast diversification of the index should help to smooth out the volatile nature of investing in smaller stocks while maintaining the potential for market-beating performance.