Table of Contents
What is the Russell 2000?
What is the S&P 500?
Russell 2000 vs. S&P 500: key differences
How to invest in the S&P 500
The bottom line
Jun 21, 2022
8 min read
The Russell 2000 serves as a useful tool for tracking and profiting from the universe of U.S. small capitalization stocks, the S&P 500 has more tech and growth stocks.
When it comes to stock market indexes—a selection of securities that track the behavior of a particular asset or class of assets—the Standard & Poor’s 500 Index, gets the lion’s share of attention. And for good reason: It’s made up of the shares of roughly 500 of the U.S.’s biggest companies, many of them household names, accounting for about 80% of the stock market’s total value.
But another benchmark, the Russell 2000 Index, offers something very different.
The Russell 2000 is a roster of 2,000 of the smallest U.S. stocks, ranked by stock market capitalization—that is, a company’s stock price multiplied by the number of shares outstanding. “It exposes you to a very different swath of companies,” says Titan strategist Myles Udland.
The company that oversees the index, the London Stock Exchange’s FTSE Russell subsidiary, recalculates the index each June, subtracting some companies and adding others using a rules-based methodology.
The Russell 2000 lacks the blue-chip names found in the S&P 500, simply because those companies are too big to be included.
As of February 2022, the Russell 2000’s top 10 stocks by market cap, in order, were:
Those companies accounted for just about 3% of the Russell 2000.
By comparison, S&P 500’s top 10—companies that have experienced years of rapid growth—account for more than a quarter of its value.
The S&P 500 is a stock-market index that consists of about 500 of the largest publicly traded companies operating in the U.S. The S&P 500 includes companies across 11 broad industry groups, or sectors.
An active index committee at Standard & Poor’s, the financial services company that owns the index, selects its members. The committee, made up of market professionals, has plenty of leeway to consider a variety of factors when deciding which companies to add or subtract—profitability, how frequently a stock trades, share splits and subjective factors like market conditions.
The five top stocks in the S&P 500 as of February 2022 are:
The least valuable of the five is worth almost $2 trillion.
Many investors compare the Russell 2000 and the S&P 500, which is arguably the most widely followed index. Here are some of the most notable differences:
Holdings. The Russell 2000 is an index of 2000 of the smallest publicly traded companies, spread across a wide range of industries. Most of the companies in the index are unfamiliar to the general public. By comparison, the S&P 500 includes 500 of the largest U.S. companies, many of them well-known brands. Because tech has grown so fast in recent years, these companies tend to dominate the index’s performance. No single sector dominates the Russell 2000, and it has no large, dominant tech companies.
Weightings. Both the Russell 2000 and the S&P 500 are market-capitalization weighted, meaning the companies with the highest market values have more sway in how the index performs. The S&P 500 is calculated somewhat differently, using a so-called “float-based” methodology that takes into account only the shares that are publicly traded and not held by the company itself.
Selection methodology. Companies are selected for the Russell 2000 based on a set of specific rules concerning market value. After 3,000 companies are included in an index called the Russell 3000, the smallest are placed in the Russell 2000. This “reconstitution” is done each June.
Members of S&P 500 must meet a variety of criteria, including trading volume, and float-based market capitalization. But a selection committee made up of market professionals makes a final determination on which companies to include based on both quantitative and qualitative factors, such as industry representation and market conditions. Changes to the index are made quarterly when the selection committee deems them necessary.
For the 10 years ended in February 2022, the Russell 2000 delivered an annualized return of about 11.2%. So an investment of $10,000 a decade ago would have grown to more than $28,000 during that span.
That trails the S&P 500, which generated a 10-year annualized return of 14.6%. That would have powered the growth of that $10,000 investment to $39,000.
There are a variety of reasons for the discrepancy.
Size accounts for much of the performance difference. The median market cap of a company in the Russell 2000 was $1.04 billion as of February 2022 versus $31.3 billion for an S&P 500 member. Large cap stocks have been on a tear since the 2008-09 financial crisis, giving the S&P 500 a decided edge.
The Russell 2000 is also comparatively light on technology stocks, which have soared in recent years, with less than 14% of the benchmark’s market cap in the sector. By contrast, the S&P 500’s tech weighting is 28%, and that doesn’t include Amazon.com and Netflix, which are categorized as retail and communications services, respectively.
The Russell 2000 also has more stocks that are considered value stocks as opposed to the growth stocks that are more prevalent in the S&P 500. The equity markets tend to favor growth or value stocks in various cycles that can last from less than a month to years. Since the financial crisis of 2007-09, value stocks have generally been out of favor, presenting a serious headwind to Russell 2000 performance.
Because value stocks tend to be less richly priced than growth stocks, the Russell 2000 carries a lower average price-to-earnings (P/E) ratio, which measures per-share net income to a share price. The Russell traded at a P/E of less than 14 in February 2022, much less than the S&P 500’s 19.6. (Both figures are based on analysts’ 2022 full-year profit estimates.)
Another underappreciated factor—a small cap index like the Russell 2000 is just that. When the shares of a mighty but tiny company rise, they get tossed out of the Russell 2000 as they exceed the top market cap limit. So winning, growing companies are removed from the benchmark to make room for newcomers. In the S&P 500, there are no rules on size that lead to removal from the index.
The Russell 2000 sometimes is compared with Standard & Poor’s SmallCap 600 Index, which like the S&P 500 also is managed by Standard & Poor’s.
While the two benchmarks have similar average market caps and valuations and volatility, their portfolios are nevertheless strikingly different.
That’s because while the Russell 2000 constituents are selected using a rules-based methodology, mostly based on their market capitalization, those of the S&P 600, like the S&P 500, are actively selected by a committee. In addition to market cap, the committee requires companies to pass a gauntlet of conditions, including trading volume, profitability, and appropriate sector representation.
The top 10 holdings in the S&P 600 are:
Not one is in the top 10 holdings of the Russell 2000.
Over both the short-and long-term,the S&P 600 consistently beats the Russell 2000. For the 12 months through February 2022, a rough period for small caps, the S&P 600 lost 6% while the Russell 2000 lost 8.7%.
For the 10 years, the S&P 600 returned 12.8% a year on average while the Russell 2000 returned 11.2%.
There are plenty of ways to invest in the Russell 2000 through index funds (mutual funds and exchange-traded funds (ETFs)).
Mutual funds that seek to track the index include:
Several ETFs that track the index include:
Many ETFs that track the index have special features, however, seeking to use leverage to magnify the index’s gains or losses.
Fees range from the Schwab Small-Cap Index Fund’s 0.04% to Fidelity’s Rydex Russell 2000 A shares, which charge a steep 1.67%, according to Morningstar.
There also are many easy ways to invest in the S&P 500 through mutual funds and ETFs. Among the largest mutual funds tracking the performance of the benchmark are:
ETFs that track the index include:
Fees are low—and a key determinant in fund performance. Some of the cheapest funds charge investors as little as 0.03% in management fees, according to Morningstar.
The Russell 2000 serves as a useful tool for tracking and profiting from the universe of U.S. small capitalization stocks—a sometimes overlooked slice of the market. The index has distinctive characteristics, strengths and limitations. In recent years, it has underperformed indexes made up of bigger companies, such as the S&P 500, which has more tech and growth stocks.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
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