Russell 2000: Things To Know About

By  //  July 26, 2021

Whether you’re new to investing or exploring ways to expand your portfolio, the Russell 2000 is full of opportunities. Similar to the S&P 500, economists view the performance of companies within the Russell 200 index as an indicator of the health of the US economy, especially for small companies. 

So what makes this a good opportunity for new investors and those looking to expand their portfolio?  New investors may find investing in small companies more accessible.

Veteran investors, on the other hand, will appreciate how little they can put in for a greater return on their investment. Of course, veteran investors also know that investing in smaller companies carries a higher risk.

Just as with any investment opportunity, your first step is to read up on it. Learn more about this small-cap index and how you can make money in the stock market by investing in the Russell 2000. 

What Is the Russell 2000 Index?

Just as the S&P 500 is an index that tracks the 500 largest publicly traded companies, the Russell 2000 tracks 2,000 of the smallest publicly traded companies.

But what do “largest” and “smallest” mean in this context? Well, it’s not a reference to company size, but rather a company’s market capitalization. 

In fact, the Russell 2000 is part of a larger index, the Rusell 3000. The Russell 2000 represents the bottom ⅔ of the index. The remaining 1,000 companies are grouped separately as part of the Russell 1000 and are large-cap stocks.

The index was started back in 1984 by the Frank Russell Company. Today, economists use the Russell 2000 to gauge the performance of the small-cap market in the US. 

Since the Russell 2000 tracks the performance of small-cap stocks, their share of the US market is only about 10%. For comparison,  the companies in the Russell 1000 represent 92% of the total US market.  

Are There Other Small-Cap Indices?

While it is true that there are other small-cap indices out there, they may not be as diverse or broad. In other words, other indices might contain fewer companies or hold some kind of bias or associated risk. 

A good example of this is the S&P 600. This is a small-cap index similar to the Russell 2000, with one distinguishing feature—there are far fewer companies. This gives the fund manager less to work with which can impart your returns.

Russell 2000 Companies List

The companies you’ll find in the Russell 2000 are selected and evaluated each year by the FTSE Russell Group. To accomplish this, the FTSE Russell Group will rank each company in the Russell 3000.

After separating the large-cap companies into the Russell 1000, the remaining small caps will make up the Russell 2000 Index. But as you know, where companies stand can change over a year.

That’s why the FTSE Russell Group reevaluates company rankings to ensure that they should be where they are. 

For example, some eligible companies may decide to go public with a public offering that meets the Russell 2000 market capitalization standards. 

This may result in some companies being added, which is why there are sometimes more than 2,000 companies in the index. 

If you’re an investor looking to get involved in a specific sector of the small-cap market, you’re in luck. The FTSE Russell Group has broken the Russell 2000 into smaller, more specific indices. 

These include the Russell 2000 Defensive, Russell 2000 Dynamic, Russell 2000 Growth, and more. 

How To Invest in Russell 2000

When you’re ready to start investing in small-cap companies, a great place to start is the Russell 2000. While it’s true that you could look up the top-performing companies in the index and invest in those individuals, there are drawbacks.

For one, investing in the Russell 2000 means you gain the benefit of any of those companies thriving while shielding yourself from the risk of any of them going under. 

On the other hand, investing in individual companies within the index means those companies better perform, or else you risk your entire investment. 

To invest in the Russell 2000, all you need to do is talk with a broker. There are several stockbrokers who offer Russell 2000 index funds and ETFs.

However, before investing in the Russell 2000 you should better understand the risks and rewards involved.

Is It a Good Thing To Invest in the Russell 2000 Index?

Being that the Russell 2000 tracks the performance of small-cap companies, and small caps tend to be more volatile, it’s not viewed the same way as the S&P 500 or Dow Jones.

The companies within the Russell 2000 are more vulnerable to negative changes and often lack financial resources. However, this is offset by the fact that small caps carry the potential for explosive growth. 

Which sounds more likely, a company’s stock doubling from $5 or another company’s stock doubling from $50? Of course, it’s easier to go from 5 to 10 than 50 to 100. But also easier to get to 0. 

This high-risk high-reward environment makes small-cap investing not suitable for everyone. 

Hyliion Set To Join Russell 3000 and Russell 2000 Indexes

As mentioned earlier, the FTSE Russell group reevaluates company rankings during the year to see who is eligible for the index. 

One company, whose mission is to reduce carbon and greenhouse gas emissions from Class 8 commercial trucks is set to enter the index.

Hyliion, headquartered in Austin Texas, is a company that designs, develops, and sells electric powertrains for Class 8 commercial trucks. 

Hyliion’s systems are made to decrease fuel consumption and operating expenses. They are designed to be integrated without disrupting existing fleet operations. 

They are expected to be added to the index when the US market opens on June 28th, 2021. 

Learn How To Become a Better Investor

Knowledge is power, and the more you can learn about investing, strategies, and the market as a whole, the better chance you have of becoming a better investor. But where can you not only learn but be part of something bigger? 

Join Dear Retail. We’re a community of like-minded investors with the aim of educating and advancing your knowledge of the stock market. We accomplish this by delivering you reports on the latest updates and news. Dear Retail Investors also have the opportunity to read reports about our top picks. See which companies have caught our attention and could be your next money-making opportunity.