What is the Russell 2000 Index?

Published by Thomas Herold in Economics, Investments, Trading

'Russell 2000 Index' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Russell 2000 Index represents a British-based American stock market index which measures the actual price performance of around 2,000 small cap companies located in the United States. It is actually a portion of the far larger capitalized Russell 3000 Index, comprised of the 3,000 largest American stocks. The Russell 2000 still equates to the major benchmark for the United States’ based small cap stocks today.

The way these two indices work is that the complete index is the Russell 3000. The lower capitalized 2,000 stocks in this 3000 Index are the ones comprising the Russell 2000 Index itself. FTSE Russell is the subsidiary company of the world renowned London Stock Exchange Group, based in the United Kingdom, which created and maintains the popular benchmarking index.

Without a doubt or real rival, the Russell 2000 Index proves to be the most frequently relied upon benchmark for the various families of mutual funds that present themselves in their prospectuses as small cap funds. Conversely, with large cap stock-based mutual funds, they rely on the S&P 500 index. It means that this Russell 2000 is easily the most frequently and universally referenced measurement for the aggregate performance in the mid cap to small cap company space and their corporate stock prices. Though it is the bottom 2,000 issues in the Russell 3000 Index, the market capitalization weighting of the 2,000 bottom stocks only turns out to be a mere eight percent of the overall market cap within the all around Russell 3000 Index.

The ticker symbol for the Russell 2000 is ^RUT on most platforms and trading systems. Per March 31st of 2017, the market capitalization weighted average for companies in the Russell 2000 remains about $2.3 billion, while the median market cap proves to be approximately $809 million. The biggest company in this popular market index has a market cap amounting to nearly $13.3 billion. The index first traded higher than the 1,000 point mark between May 21st and May 22nd in 2013.

A similar but not serious rival to this small cap behemoth index is the S&P 600, produced by Standard & Poor’s. It is far less frequently sourced and cited, as are other competitors maintained by various rival financial providers.

One unique breakdown of the Russell 3000 and Russell 2000 indices is for a special sub index called the Russell 3000 Growth Index. Included in this special index are companies which demonstrate greater than average levels of growth. This is why this growth index is utilized as a best measurement gauge of the American growth segment stocks. In order to be included in the Russell 3000 Growth Index, they must demonstrate higher forecast earnings and greater price to book values.

The company Russell Investments has a precise procedure for determining these various indices component stocks. They screen the biggest 3,000 common stocks in the United States to form the Russell 3000 Index. The biggest 1,000 companies screened are named composite members of the Russell 1000 Index, while the subsequent 2,000 companies become members of the Russell 2000 Index. Russell Investments has strict rules on those issues which can not be included in their indices. They may not be either foreign stocks or ADR American Depository Receipts. They also can not be components of the BB bulletin board stocks or OTC pink sheet stocks.

It is interesting to note that investors who like this Russell 2000 Index have a number of options in both exchange traded funds as well as mutual funds that do their best to replicate its real performance. None of them match it perfectly though. This is because there are trading costs and expenses involved in acquiring the various 2,000 component companies, stock selection market cap imbalances, and changes to the index’s constituent companies which are difficult to replicate with precision. Investors can not directly invest in the index itself, or any stock market index for that matter.

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The term 'Russell 2000 Index' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.