What Is Russell 2000 Index and How Does It Work?

The Russell Index, a widely recognized stock market benchmark, provides investors with a comprehensive view of the performance of smaller public companies in the United States. Composed of different subsets, such as the Russell 2000 and Russell 3000, it encompasses a broad range of industries. This index is renowned for its inclusion of growth-oriented companies, offering investors exposure to potential high-growth stocks.

Russell 2000 is widely recognized as one of the most followed indexes in the financial industry. If you have been looking to understand all that concerns Rusell 2000, here’s a guide for you to explore. Below, we will delve into the details of the Russell 2000 index, its history, how it works, and how it differs from other indexes.

Russell 2000 Defined

The Russell 2000, often referred to as the R2K, is a stock market index that enables investors to track up to 2000 stocks. It differs from the Russell 3000 Index, which is a broader index that includes the largest 3,000 publicly traded US companies. By focusing on smaller companies, the Russell 2000 aims to provide investors with insight into the performance of the small-cap segment of the market. Covering stocks across various industries, the Russell 2000 is frequently used as a reference point and a tool for diversification within investment portfolios.

History of Russell 2000

The Russell 2000 has a rich history that traces back to the late 1970s. Created by the Frank Russell Company, it was established as an infrastructure for measuring the performance of small-cap stocks in the United States. The index was launched in 1984, initially with a base value of 135. Throughout its history, the index has undergone periodic rebalancing and reconstitution to reflect changes in the market. The Russell 2000’s annual reconstitution process, which takes place in June, involves adding or removing stocks based on their market capitalization rankings. The history of the Russell 2000 showcases its evolution as a significant index for measuring the performance of companies. With its diverse range of constituents and annual reconstitution process, it has grown to become one of the most widely followed and recognized indices in the financial industry.

How Russell 2000 Index Works

The Russell 2000 is a market capitalization-weighted index, which means that the performance of each stock is based on its market value relative to the total market value of all the stocks in the index. The composition of the index is updated every year, in June, and companies can move in and out of the index based on their market capitalization at the time of reconstitution.

The index includes companies from various sectors such as healthcare, technology, financial services, consumer discretionary, and industrials. The inclusion criteria for a company to be eligible for the Russell 2000 index are a market capitalization between roughly $20 million and $10 billion, US incorporation, and being listed on a major US exchange.

Russell 2000 Compared to Other Indexes

The Russell 2000 differs from other popular indexes, such as the S&P 500 or the Dow Jones Industrial Average, in several ways. It focuses on small-cap stocks, whereas the S&P 500 includes larger, more established companies. This difference in composition means that the performance of the Russell 2000 can vary significantly from that of the S&P 500 or the Dow Jones Industrial Average. Meanwhile, the Russell 2000 is broader than the Dow Jones Industrial Average, which consists of only 30 large-cap stocks. This broader representation of smaller companies provides investors with exposure to a wider range of industries and potentially higher growth opportunities.

The indexes also differ in their performance. There were various periods in the market history, and the indexes reacted in different ways.

For example, in 1979-1983, during a period of extreme economic turbulence in the stock market, the Russell 2000 outperformed the S&P 500 by 80%. It was a time of double-digit inflation, double-digit interest rates, and back-to-back recessions. At the time, investors judged that smaller companies navigated the environment more nimbly than larger ones.

Later, in 1983-1990, large caps rebounded. As a result, the S&P 500 outperformed the Russell 2000 by 91%, more than recovering its 1979-83 period of underperformance.

Such periods and shifts of dominance have repeated a few times, depending on the general economic situation.

Conclusion

The Russell 2000 index plays a crucial role in the financial markets by providing investors with insights into the performance of small-cap stocks. Serving as a stock market index that operates on a transparent and rules-based methodology, Rusell 2000 represents a diverse group of companies from various sectors, offering investors exposure to the potential growth opportunities associated with smaller companies.

By understanding how the Russell 2000 works and its differences compared to other indexes, investors can make more weighted decisions when it comes to their investment strategies.