The Russell 2000 is an index of small-company stocks, associated with the ticker symbol RUT.
An index is a list of stocks or other investments that are similar in size or fall into the same economic sector.
That might be the largest U.S. companies by size, such as the S&P 500, or the entire bond market or a niche investment, such as just transportation-related stocks.
The purpose of an index is to provide a sense to investors of the relative performance of a specific part of the investment universe and, by extension, the economy itself.
In the case of the Russell 2000, it’s the bottom two-thirds of the larger Russell 3000 Index of the largest U.S. stocks. These lists are maintained by the London Stock Exchange Group and the Frank Russell Company.
Recently, companies in the Russell 2000 Index had a median market cap of $818 million. The weighted average was $2.43 billion. In comparison, the cut-off for inclusion in the S&P 500 Index recently was $8.2 billion.
Since the Russell 2000 is made up of smaller companies on the list, investors and researchers can measure the performance on average of small U.S. companies vs. the S&P 500 or the Dow Jones Industrials, which is the largest 30 U.S. firms.
Another small-cap index used by investors is the S&P 600. This index tracks small-cap companies with recent capitalization of between $400 million and $1.8 billion.
In addition, many companies that create and track indexes also track mid-cap firms, which are companies that are larger than small-caps by market size but not as large as the largest firms.
Of course, companies grow and change, some of them “graduating” into larger index listings and some getting smaller or even ceasing to operate. That can be due to bankruptcy but also because they got bought by a larger competitor or merged with a rival.
Generally speaking, research has shown that smaller companies can offer returns that are different from the larger, more established companies. Small company stocks also generally are more volatile in comparison to large firms.
When investment managers look to construct a portfolio for an investment goal, owning different parts of the stock and bond market can provide diversification. The goal of a diversified portfolio is to replicate a target annualized return while lowering volatility.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.