What is the Russell 2000, and why small companies matter
The Russell 2000 tracks about 2,000 smaller US companies. Here is what it measures and why investors watch it alongside the S&P 500.
Most market news is about the biggest companies. The Russell 2000 is different. It follows the smaller end of the US stock market, and many investors watch it as a sign of how ordinary American businesses are doing.
What it is
The Russell 2000 is an index of about 2,000 smaller US companies. An index is a list of companies turned into one number, so you can see how the group is doing at a glance.
It is run by FTSE Russell. The company starts with a wider list of about 3,000 US companies, called the Russell 3000. The largest 1,000 are left out. The next 2,000 make up the Russell 2000.
Like the S&P 500, it gives bigger companies more weight. But even the largest companies in it are small next to the giants in the S&P 500.
What "small" means here
In stock market terms, company size usually means market value: the share price times the number of shares. These are often called "small caps", short for small capitalisation.
Small here is relative. Many companies in the Russell 2000 are still worth hundreds of millions or billions of dollars. They are just much smaller than the household names.
Why small companies matter
- They lean on the US economy. Many sell mostly at home, so their results track US spending and business activity closely.
- They borrow more. Smaller companies often rely more on bank loans and floating-rate debt. That makes them sensitive to interest rates.
- They are where some growth starts. Some of today's large companies were once small caps.
Because of this, a strong Russell 2000 is often read as a sign of confidence in the US economy. A weak one can suggest worry.
Bigger swings
Small company shares tend to rise and fall more sharply than large ones. Their profits are less steady, fewer people trade their shares, and a single problem can hit a small business hard.
So on a day when the S&P 500 moves 1%, it is common to see the Russell 2000 move more, in either direction.
The Canadian side
Canada has its own small company index, the S&P/TSX SmallCap Index. It is much smaller than the Russell 2000, and it has a large share of energy and mining companies.
The short version
- The Russell 2000 tracks about 2,000 smaller US companies.
- It is often seen as a gauge of the US domestic economy.
- Small companies tend to be more sensitive to interest rates.
- Expect bigger swings than in large company indexes.
This is general information, not investment advice.
Updated