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What is the Russell 2000?
The Russell 2000 Index follows the performance of a group of roughly 2,000 small-cap stocks. Its focus on smaller companies makes it a common economic indicator for that segment of the U.S. market, which includes public companies with market capitalization between $250 million and $2 billion.
The basics of the Russell 2000
Created in 1984, the Russell 2000 is one of dozens of indices published by FTSE Russell, a financial services company.
Member companies, called constituents, are selected based on market capitalization — a measure of market value calculated by multiplying a company’s share price by its number of outstanding shares.
The Russell 2000 Index follows the performance of smaller public companies, which tend to have ample room for growth while also being more vulnerable than larger companies to shifts in the economy.
The index is reviewed and updated annually so it continues to provide an accurate picture of small-cap stock performance.
Why the Russell 2000 matters
Owning stocks of various sizes is a common strategy for people looking to diversify their investments. Other well-known indices, including the Dow Jones Industrial Average and the S&P 500, focus on large-cap stocks of well-established companies. But the Russell 2000 is a popular index for gauging returns on U.S. small-cap stocks.
As a segment of the market, small-cap stocks are considered more aggressive investments compared with large-cap stocks, which are considered more conservative. This is because small-cap stocks tend to be smaller, younger companies that are more likely to be impacted by changes in the economy, for good or bad. These companies also tend to be more niche or have fewer streams of income, which can make them less stable than broader companies serving larger markets and with multiple sources of revenue.
What’s in the Russell 2000
Russell 2000 constituents are chosen based on their market size and membership in the Russell 3000.
The largest 3,000 stocks comprise the Russell 3000. As a subset of that index, the Russell 2000 includes stocks ranked Nos. 1,001 to 3,000 in the Russell 3000. These stocks amount to roughly 10% of the total market capitalization of the larger Russell 3000 index.
To determine which stocks will make up the index, FTSE Russell ranks all U.S. securities from largest to smallest market capitalization.
To be included in a Russell U.S. index, stocks must trade on an eligible U.S. exchange, including the Chicago Board Options Exchange, the New York Stock Exchange, NYSE American, NYSE Arca and the Nasdaq. Shares must be priced at or above $1 on the date market capitalization is calculated for ranking. Lastly, companies must have a market capitalization of $30 million or more.
The most recent list of Russell 2000 constituents includes companies spanning industries like health care, finance, energy, technology, real estate and consumer goods.
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What to know about Russell 2000 reconstitution
FTSE Russell sticks to an annual cadence for reviewing and changing the makeup of its U.S. indices based on updated market capitalization. The process is called reconstitution. For the Russell 2000, the purpose is to remove companies that have outgrown the index and would distort measurements of the small-cap segment of the stock market.
Reconstitution is slated for the fourth Friday in June each year. The annual event is marked by higher-than-normal trade volume for stocks that move off of one index or onto another. That’s because investment funds linked to an index like the Russell 2000 make large-scale trades to rebalance their portfolios to mirror the reconstituted index.
However, some changes occur throughout the year. FTSE Russell takes corporate activity into account on a daily basis. A company’s presence in an index or its weight in the index can change based on company actions, such as a merger or acquisition. Each quarter, eligible companies that debuted on the markets through an initial public offering, or IPO, are added to the appropriate index.