
Stock Market Bubble? Here's How to End Up a Winner
If you're afraid of a pop, it's best to be prepared.
While the Dow Jones Industrial Average and the S&P 500 get most of the headline attention, it’s important for investors to understand that there are many different stock indexes. One of the most popular indexes that doesn’t invest in large companies is known as the Russell 2000, and it is widely considered the benchmark for smaller U.S. stocks.
With that in mind, here’s a rundown of what investors should know about the Russell 2000 Index, how it works, and whether it could be a smart investment choice for you.
The Russell 2000 Index is the most widely used index of small-cap stocks -- stocks with a relatively small market capitalization. There are no hard-and-fast rules as to when a stock is a small cap. The key point to know here is that there’s a broad market index known as the Russell 3000 Index, which is divided into two smaller ones: the Russell 1000, which accounts for the 1,000 largest companies, and the Russell 2000, which accounts for the remaining two-thirds.
The median market cap of the stocks in the Russell 2000 Index is $2.3 billion, but there is quite a wide range, as you might expect from a collection of 2,000 companies. The largest company in the index has a market cap of $9 billion, while the smaller ones have market caps in the $200 million ballpark.
The Russell 2000 is a market capitalization-weighted index, as are the majority of popular stock indexes (the Dow Jones Industrial Average being the main exception). This means that the 2,000 companies that make up the index don't contribute equally to its performance. Larger companies have a proportionally higher impact than smaller ones.
It wouldn’t be practical to list all 2,000 companies here. Instead, here are 10 of the largest Russell 2000 companies, just to give you an idea of the types of companies that make up the index.
Data source: FTSE Russell. Top 10 holdings as of Jan. 31, 2020.
The takeaway is that while these aren't exactly tiny enterprises, they aren't giant companies, either. That's the key difference between the Russell 2000 and the "headline" indexes.
If you want to invest in the Russell 2000 Index, you don’t need to buy all 2,000 stocks. You can invest in the index rather easily through a mutual fund or exchange-traded fund (ETF) designed to passively track it.
One good example is the Vanguard Russell 2000 ETF (NASDAQ:VTWO), which invests in all the stocks in the index according to their relative weights. With a small (0.10%) expense ratio, fees are low, so the fund’s long-term performance should be virtually identical to that of the index itself.
Tracking 500 of the largest-capitalization companies in the market.
Tracking 30 of the largest blue chip companies on the market.
Tracking all public companies that trade on the Nasdaq exchange.
There are many important stock indexes, and all focus on a different basket of stocks. Some of the most common:
So what makes the Russell 2000 different from the rest?
In a nutshell, the Russell 2000 is composed of smaller and more volatile stocks than those in large-cap indexes, but the large number of companies in the index helps mitigate the risk, since it's less reliant on any particular stock's performance.
Investing in the Russell 2000 is a great way to get exposure to the exciting world of small-cap investing without relying too heavily on the performance of any single company. The vast diversification of the index should help to smooth out the volatile nature of investing in smaller stocks while maintaining the potential for market-beating performance.
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