The Russell 2000 Index isn’t often talked about with stock investing like the Dow Jones Industrial Average or S&P 500, yet it’s still an index that’s still important to follow for insights in the American economic landscape.
What is the Russell 2000 Index?
The Russell 2000 Index was created in 1984 by the Frank Russell Company. The Russell 2000 index is part of the larger Russell 3000 Index that focuses on smaller businesses in the U.S. Even though we say “small business,” the largest company in the index is more than $10 billion, while the median market cap is $854 million. The Russell 2000 in particular is the bottom 2,000 stocks within the Russell 3000 index which makes the Russell 2000 a small cap stock market index. Compared to the Dow, the companies within the Russell 2000 don’t do much international business. The Russell 2000 makes up about 10 percent of capitalization in the U.S. stock market.
How Does the Russell 2000 Work?
The Russell 2000 excludes stocks that trade below $1.00, bulletin board stocks, pink sheet stocks, closed-end mutual funds, royalty trusts, foreign stocks, limited partnerships and ADR’s. There are instances where a company can go from small-cap to medium-cap stock, so the Russell 2000 is redone every year in May.
The Russell 2000 Index works different from other indices because it’s calculated by shares outstanding, or the last stock price with the number of shares that are traded. Typically a company’s full market capitalization is used to determine stock prices.
Why Is the Russell 2000 Index is Important?
The Russell 2000 Index is important to track because over the long run, small cap stocks tend to outperform large cap stocks which compounds significantly over time. This means that even though the companies included in this index are considered smaller valuations, these companies end up outperforming large companies in the long term from a stock investment standpoint.
The Russell 2000 Index is much broader than other indices since it uses small-cap stocks. Since the companies within the Russell 2000 are still small, this index can be highly volatile. However, the Russell 2000 Index is typically compared to the performance of mutual funds because the Russell 2000 tends to show return possibility of the entire market versus other indices that are more narrow and contain bias and show risk of specific stocks.
There are many different indices to consider when looking at investment in the stock market, and the Russell 2000 Index is a good performer even though not as popular as other indices.