Russell 2000® Index: The original benchmark for US small caps

The Russell US indexes offer a comprehensive view of the US equity opportunity set, ranging from mega-cap to micro-cap stocks.

They are the leading US benchmarks for institutional investors, with approximately $10.6trn benchmarked to the Russell indexes.

The Russell US indexes follow a modular construction approach, covering market segments (large, mid and small cap) and investment styles (growth vs. value and defensive vs. dynamic).

In each case, the constituent indexes sum up to the Russell 3000 index, a broad index of the top 3,000 US stocks by market capitalization. The Russell 3000 covers around 98% of the US equity investable universe.

The starting universe for the Russell US indexes consists of companies classified as having US nationality and which trade on a major US stock exchange each year on ‘rank day’ (the last business day in April). There are certain categories of stock that are excluded from consideration (see the paper for more information on these).

On each annual rank day, we rank and capture the top 4,000 securities above $30m in market capitalization to form the Russell 3000E index. The largest 3,000 stocks in the Russell 3000E index then become the Russell 3000 index.

Next, we segment the Russell 3000 index into the Russell 1000 index (representing large-cap US stocks) and the Russell 2000 index.

For existing index members, a 5% band (based on total market cap percentiles) is placed around the breakpoint between large- and small-cap companies, helping eliminate unnecessary index turnover.

In other words, a Russell 1000 index member that has fallen down the capitalization rankings won’t be relegated to the Russell 2000 until it has moved 2.5% below the breakpoint and a Russell 2000 index member that has moved up the capitalization rankings won’t be promoted to the Russell 1000 until it has moved 2.5% above the breakpoint.

Taken together, these construction rules ensure that the Russell 2000 index serves its purpose as a comprehensive, transparent and objective measure of the performance of US small-cap stocks.

Since the Russell US indexes’ creation in 1984, the breakpoint between the Russell 1000 and Russell 2000 has varied dynamically to reflect the shifting valuations of US stocks.

At $5.2 billion, the 2021 breakpoint was over four times higher than in June 2009, in the immediate aftermath of the global financial crisis. It was over 20 times higher than in 1984, when the Russell Indexes were launched.

This design feature means that a stock can move seamlessly between the small-cap Russell 2000 and the large-cap Russell 1000 indexes without reliance on a fixed market capitalization target.

By contrast, some other US small-cap indexes rely on fixed market capitalization ranges to determine index eligibility. This approach fails to account for market movements and can generate significant turnover at index reviews.

Markets evolve continuously as new stocks are listed and others disappear as a result of delistings, mergers and acquisitions.

To ensure that the Russell US indexes continue to represent the US equity opportunity set accurately, we update them daily for corporate actions, such as dividends, delistings, mergers and acquisitions, spin-offs and stock splits. We adjust the indexes quarterly for adjustments in share counts and initial public offerings (IPOs - see the paper for more information).

Each June, we undertake a full reconstitution of the indexes by ranking stocks and resetting the index membership lists.

Over time, some of the best-known US stocks (such as Nvidia, Netflix and Amazon.com) first joined the Russell 2000 through the regular IPO addition or annual reconstitution process, before later moving up to the large-cap Russell 1000 index as a result of share price appreciation.

In many cases, stocks that joined the Russell US index series in this way enjoyed substantial share price appreciation before later being added to the S&P 500 index.

Over the four decades since its launch in 1984, the Russell 2000 index has become the preferred US small-cap benchmark for many investors, market analysts and commentators.

Together with the other indexes within the Russell US index range, the Russell 2000 has succeeded because it is:

• Transparent - it is constructed using an open, published, rules-based methodology that’s designed to be easy to understand for any market participant
• Representative - it is modular in design and constructed to be objective and comprehensive, with full coverage of the underlying market segment
• Pioneering - Russell US indexes were the first (in 1984) to adjust index constituent weights for freely floating shares and the Russell US style indexes, launched in 1987, were also the first of their kind
• Accurate - Russell US indexes are rigorously maintained via daily corporate actions, quarterly share adjustments and IPO inclusions and annual total reconstitution
• Accessible - Russell US index data products are available through more than 80 leading analytic platforms.

By staying true to these attributes, the Russell 2000 has consistently captured the investable opportunity set of innovative US smaller companies. In doing so, the Russell 2000 has helped index users to measure the small-cap premium and to gain early exposure to many future equity market winners.