The Russell 2000 Index, which trades under the symbol RUT, assesses the performance of small capital companies. The index’s comprehensive design has made it the most widely used benchmark that evaluates the small-capitalization equities market and it is the basis for active and passive investment products.

The Russell 2000 is the first index that evaluates the small-cap market segment. During recent years the growth of index-based investment approaches like exchange-traded funds has given participants in the market a cost-effective way of gaining exposure to the small-capitalization stocks. The ETFs’ high liquidity that tracks the Russell 2000 Index has been used by some participants to offset the fees and increase the returns through lending programs.

Origins of the Russell 2000 Index

It was created in 1984 by Frank Russell Company and comprised the lower two-thirds of the Russell 3000 Index. It is a larger index made of 3000 publicly traded companies that form the majority of the American Stock Exchange. Mutual fund investors prefer the Russell 2000 because it shows the investment opportunities presented by the market instead of the potential given by narrower indices. These may have a bias in their selections and hence impede the performance of the fund.

The Russell 2000 Index is also the most widely quoted measure for small and mid-capitalized stocks’ performance. It represents an estimated 10 percent of the market capitalization from the Russell 3000 Index. The average value of a company represented in the Index 2000 as of mid-2020 is $2.1 billion, while the median market capitalization is 639 million.

These are not necessarily titans of industry; however, they are not struggling and provide the potential for vast expansion. Several have regarded the Russell 2000 as a significant benchmark for the American economy, considering it measures domestically focused businesses’ performance. The Russell 2000 Index is investable by replicating the index by utilizing component shares or index futures and ETFs.

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Russell 2000 Index Results in High Liquidity

The adoption of the Russell 2000 Index has led to a financial product ecosystem set according to the index, which includes active and passive institutional funds, futures, and ETFs. When they are combined, the developments lead to a lot of liquidity for market participants seeking exposure to the US small-cap stocks.

To get the most of the small-cap premium, one has to control costs that can erode potential excess returns. Index-based investment vehicles like futures and ETFs may provide the right means for participants in the market to access the smaller cap stocks portfolios, which are designed to track the Russell 2000 Index. The market liquidity may assist in reducing the trading costs lined with bid/ask spreads. It would also mitigate the potential market effect for trades.

Russell 2000 Index vs. Different Market Indices

As opposed to the Dow Jones Industrial Average, the Russell 2000 Index is weighted according to shares outstanding. It means a member’s stocks last sale price, and the number of shares may influence the index. The other alterations of the Russell 2000 Index measure the performance of companies with special characters.

For example, the growth index assesses companies’ performances that have a higher price to book ratios and lower forecasted growth value. The other difference between the major indices and Russel 2000 is it benchmarks small-cap stocks. The Down Jones and S&P 500 for one track the large-cap stocks.

Since it focuses on smaller companies and has 2000 of them, it is more diversified than the S&P 500. It is less top-heavy as well, which means it is not dependent on top organizations’ performance. The Russell Index 2000 has a healthy distribution of companies from different fields. While they tend to be more volatile, the smaller cap stocks tend to have higher growth potential than the larger companies, which may be represented by Dow Jones or the S&P 500.

It would be much harder for Apple to double in size than for a new Silicon Valley tech firm to double a $1 billion market cap. While the price swings tend to be dramatic, the small-cap stocks tend to outperform large-cap stocks over a longer period. They do entail more risk, though. It would not be surprising if the Russell 2000 experiences more dramatic swings than the large-cap indexes. Long term investors may not find this assuring considering the low stability associated with the portfolios.

Investing in Russell 2000 is a good way to enter small-cap investing without relying on just one company’s performance. The index’s diversity helps to smooth out the volatile nature of the small stocks while also retaining the potential for great performance in the market.


Chris Douthit
Chris Douthit

Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs and the founder of OptionStrategiesInsider.com. His work, market predictions, and options strategies approach has been featured on NASDAQ, Seeking Alpha, Marketplace, and Hackernoon.