The Russell Indexes track stocks’ prices in the United States, Canada, Europe, Australia, and Asia. This guide will give you an overview of these indexes so you can better comprehend them.
The Russell Indexes are a family of stock market indexes that measure the performance relative to the US equity market of various segments in different countries worldwide. The indexes take their name after their developer, American economist and co-founder of the New York Stock Exchange (NYSE), Charles Henry Dow (1851-1902), who created them to provide an analytical tool for understanding trends in global markets at a time when there was no such thing as “globalization.”
Russell Indexes are used to measure the performance of securities in different sectors of the economy. The group is one of India’s oldest and most widely followed indexes, with a history dating back to 1969. All listed companies on the Indian Stock Exchange (BSE & NSE) are divided into ten broad sectors, further classified into sub-sectors depending upon the industry they represent.
The top 300 stocks by free-float market capitalization form the core index, representing typically 85% of total market capitalization on either the National Stock Exchange or Bombay Stock Exchange. The Russell 3000 Index, introduced in 1991, is a US-based stock benchmark that tracks the 3,000 largest publically traded companies domiciled in America to measure the entire US stock market. Another variant, the Russell 2000 Index, tracks 2,000 smaller stocks making up the American equity market. The common approach for these indices is to equally weigh all constituents and take a simple average of their returns. In other words, if a company has a ten percent weight in an index, it will have twice the influence on index performance as a company with a five percent weight in an index.
Russell Indexes
Russell indexes are known by almost every investor. They are popular because they are considered to be an excellent way to track the market. However, many investors do not understand the methodology behind these indexes and why they are so reliable for gauging market movement. The purpose of this article is to provide a brief overview of how Russell Indexes operate and why they are essential.
In 1937, the index was established by Frank Russell Company of Tacoma, Washington, a subsidiary of Russell Investments of Seattle, Washington. The goal of the indexes was to track the growth of the United States stock market as represented by about 90 stocks from various industrial sectors. In 1973, this number increased exponentially with new indexes that would provide investors with different diversification options depending on their risk tolerance and desired objectives. For example, there is a small-cap index for those who want small companies with potential for significant gains, a value index for those who want more stability but less risk, and many others.
In formula calculation methodology, each index within this family is based on a free-float capitalization-weighted methodology. This makes them more accurate than other capitalization-weighted indexes because it eliminates the problem of double counting stocks due to companies’ repurchasing policies on shares, reducing their market share and available market capitalization on the free market.
How Are Russell Indexes Calculated?
The weighting of each company in an index is done by multiplying the price of an individual stock with its total number of outstanding shares (free float method). Once all weightings are determined, this information is used in conjunction with aggregate dollar value calculations to determine the dollar value for each level of any specific index. The percentage allocated at any given level is then recalculated using aggregate data collected the last business day or week, depending on the index. This process is repeated until all indexes show 100% representation with values that fall between 0 and 1.
Russell 3000
The Russell 3000 Index, introduced in 1991, is a US-based stock benchmark that tracks the 3,000 largest publically traded companies domiciled in America to measure the entire US stock market. Another variant, the Russell 2000 Index, tracks 2,000 smaller stocks making up the American equity market. The common approach for these indices is to equally weigh all constituents and take a simple average of their returns. In other words, if a company has a ten percent weight in an index, it will have twice the influence on index performance as a company with a five percent weight in an index.
Russell 2000
Russell 2000 Index includes 2,000 US-domiciled common stocks traded primarily on the New York Stock Exchange, American Stock Exchange (Amex), and NASDAQ. It is a benchmark for mutual funds that specialize in small-cap equity investing.
The index was created on June 1, 1979. The members of the Russell 2000 Index are contained in the Russell Microcap Index.
Russell 2000 Value Index measures the performance of those Russell 2000 companies with higher prices relative to their fundamentals. This style is considered a subset of the “value” style defined by Morningstar Inc., which includes metrics such as earnings momentum and surprise history, among others.
As such, this index is sometimes referred to as “price-weighted”. In other words, each security receives a weighting proportional to its price divided by the aggregate value of all shares in the index.
Russell 1000
Russell 1000 Index is a comprehensive market-cap weighted index for large and mid such as Exxon Mobil Corporation (NYSE: XOM), Apple Inc (NYSE: AAPL), Microsoft Corp (NASDAQ: MSFT). It tracks the broad US stock market by including about 1,000 of the largest securities. These include common stocks of domestic corporations and real estate investment trusts (REITs), whose purchase and sale offer a reliable proxy for all the investable securities in the market.
The Russell 1000 index covers approximately 92% of US equity markets, leaving most small-cap companies with less liquidity and more volatile than larger companies’ stocks. The 1000th company joined on December 23rd, 2010, when overstock.com went public, and it became the 1000th largest company in the U.S.
Russell vs S&P 500
Both Russell and S&P 500 can trace their roots back more than 100 years and have become trusted institutions on Wall Street. However, the two indexes are not the same. They have very different approaches to indexing which is essential information for any investor to understand.
One glance at the two companies’ performance over the last five years makes it instantly clear that there is no contest. The S&P 500 wins, hands down. Since 2010, the S&P 500 has grown by 46% as of October 2021, while Russell lagged far behind with just 11%.
While value-based indexes continue to grow in popularity, it is unlikely that Russell will overtake the S&P 500 any time soon. The companies that make up the S&P 500 have been outperforming Russell’s index for years, and it doesn’t look like their lead will diminish anytime soon.
Conclusion
The Russell Indexes are a series of indexes that represent different investment styles. The Russel Investments Company publishes these indexes to track the performance of certain groups of stocks performance and help investors gauge how their investments are doing compared to those companies represented in the index. By using indices such as these, investors can compare their own choices to a large group of investments and see if they are performing up to standard or not.