When it comes to the stock market, big companies like Apple and Tesla tend to dominate the headlines.
But there are thousands of small companies that can add growth and diversification to your investments — for cheap.
That’s what you get with the Russell 2000 Index, a low-cost fund that tracks the performance of 2,000 small-cap companies on the stock market. As part of an investing portfolio that also gives you exposure to broader indices, some financial experts recommend taking a look.
“With innovations over the last several decades and the growth of ETFs and index funds, decreased commission costs, and increased market liquidity, it’s become easier to get access to this index, which I think is an important part of a diversified portfolio,” said Ford Donohue, a Chartered Financial Analyst and Director at Homrich Berg Wealth Management.
Keep reading to learn more about the Russell 2000 index, how it compares to other stock indices, and how you can add it to your investment portfolio.
What Is the Russell 2000 Index?
The Russell 2000 is a stock index that tracks 2,000 small cap companies in the United States. A small cap stock is a company with a market capitalization less than $2 billion. The market cap refers to the total value of a given company’s total shares of stock. According to the index’s factsheet, its goal is to “provide a comprehensive and unbiased small-cap barometer.”
It’s a smaller subset of the Russell 3000, which is a measure of the broad stock market.
“The Russell 2000 is a proxy for the small capitalization sector of the U.S. stock market,” said Robert Johnson, a professor of finance at the Heider College of Business at Creighton University. “It is considered a good indication of the entire small capitalization universe. It should be noted that while it includes 2,000 stocks, given the small cap nature of those stocks, it only represents about 10% of the market capitalization of the broader Russell 3000 index.”
The Russell 2000 includes companies from 11 different industries, with the most prevalent being healthcare, financials, industrials, consumer discretionary, and technology. The top 10 companies in the index are:
- AMC Entertainment
- Intellia Therapeutics Inc
- Crocs In
- Lattice Semiconductor
- Tenet Healthcare Corp
- BJ’s Wholesale Club
- Tetra Tech Inc
- Varonis Systems Inc
- Rexnord Corp
- Staar Surgical Co
Russell 2000 Index vs. Other Market Indices
The Russell 2000 is just one of many stock indices in the market. First, let’s talk about how the Russell 2000 relates to the larger Russell 3000 index.
The Russell 3000 is a stock index that tracks the performance of the broad stock market, representing roughly 98% of the U.S. equities market. Think of it as a snapshot of the stock market as a whole.
The Russell 3000 then breaks down into two smaller indices: the Russell 1000 and the Russell 2000. The Russell 1000 is made up of the 1000 largest companies in the larger index, and the Russell 2000 is made up of the 2000 smallest.
The other index it’s important to discuss is the S&P 500, which is likely the most well-known stock index. The S&P 500, largely considered the best indicator of the U.S. large cap equities market, is made up of 500 of the largest publicly traded U.S. companies.
The key difference between the Russell 2000 versus the Russell 1000 or the S&P 500 is that while the Russell 2000 represents the small cap equities market, the Russell 1000 and S&P 500 represent the large cap equities market.
As a result, the Russell 2000 is “much more diversified,” Donohue said. “The largest stocks don’t make up nearly as much of the index as you might see with the S&P 500 or the Russell 1000.”
In the case of the S&P 500, the top companies largely fall into the technology industry and include companies like Apple, Microsoft, Facebook, and Google. In fact, more than one-third of companies in the S&P 500 are classified as either information technology or communications services companies.
The Russell 2000, lacking these major tech companies, allows for more exposure to other sectors, including healthcare, financials, consumer goods, and real estate.
For those who want a more hands-off approach that has been proven to beat the market, look into target index funds, which provide diversification suitable for your age and investing timeline — without having to choose between or balance different funds.
How to Invest in the Russell 2000 Index
Now that we’ve talked about what the Russell 2000 index is, let’s talk about how you can add it to your investment portfolio.
The simplest way to add this index to your portfolio is by investing in a Russell 2000 index fund or exchange-traded fund (ETF). Think of it as investing in all 2,000 companies in the index, but with a single security.
If you’re adding the Russell 2000 to your investment portfolio, be sure to diversify with large cap equities and other less volatile securities.
Most major fund providers offer either a Russell 2000 index fund or ETF (or both). Examples include the Vanguard 2000 ETF (VTWO), the Fidelity Small Cap Index Fund (FSSNX), and BlackRock’s iShares Russell 2000 Small Cap Index Fund (BDBPX).
“For those investors with either a penchant for a value or growth style, one can also choose an index fund that separates the value or growth component of the small cap index,” Johnson said.
As examples of these more specialized types of funds, Johnson points to the Vanguard Russell 2000 Value ETF (VTWV) and the Vanguard Russell 2000 Growth ETF (VTWG), which both have an expense ratio of 0.15%. Expense ratios are fees investors pay annually and the lower the expense, the better for the investor.
If you’re considering adding the Russell 2000 to your portfolio, it’s important to understand some of the characteristics of small cap stocks. As small companies, they tend to be more volatile. They may grow more quickly than many of their large cap counterparts, but also haven’t necessarily proven themselves in the long term.
Ideally, a diversified portfolio would include small cap stocks from the Russell 2000, as well as more established companies found in the Russell 1000 or S&P 500.
What companies are in the Russell 2000?
The Russell 2000 includes 2000 different small-cap stocks across 11 different industries. The largest companies in the index are AMC Entertainment, Intellia Therapeutics, and Crocs.
What’s the difference between the Russell 2000 and the Russell 1000?
The Russell 2000 and Russell 1000 both represent segments of the larger Russell 3000 index. The Russell 2000 is made up of the 2,000 smallest companies in the larger index, while the Russell 1000 is made up of the 1,000 largest.
What is the average return of the Russell 2000?
As of August 31, 2021, the Russell 2000 had an annual return over the previous year of 47.08%. Over the previous 10 years, the average annual return was 13.62%
Is the Russell 2000 a good investment?
Investing in the Russell 2000 can be a good way of gaining exposure to the U.S. small cap market. It can provide diversification to a portfolio with other securities, but shouldn’t be the only investment in your portfolio.