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What in the world
is the Russell 2000?
By Laura
Bruce • Bankrate.com
It sounds like a car race from hell -- a never-ending
version of the Indy 500. Actually, the Russell
2000 is the best known index of small-cap stocks. Small-cap
has nothing to do with the size of your hat. It's all about money
-- how much a company is worth on the market. The average company
in the Russell 2000 has a market capitalization of about $525 million.
Compare that to the average large-cap company, which is worth about
$12 billion, and the average mid-cap which comes in at about $4
billion. (To calculate market
capitalization, multiply the price of a share of stock by the
total number of shares outstanding.)
The Russell 2000 is one of the sons of the Russell
3000, which measures the performance of the 3,000 largest U.S. companies,
based on market capitalization. The third member of the Russell
family, the Russell 1000, measures the performance of the 1,000
biggest companies in the Russell 3000. Those big companies make
up 90 percent of the market cap of the Papa Index, while the Russell
2000 measures the small-cap companies, which comprise just 10 percent
of the value of the top 3,000.
That's not to say the Russell 2000 is filled with
a bunch of no-name penny stocks. Callaway Golf (ELY),
Chiquita Brands (CQB)
and General Nutrition (GNCI)
are some of the companies represented on the index. Financial services
companies make up the biggest sector of the index -- more than 23
percent.
That's followed by consumer discretionary, technology
and health care companies.
Some investors like to bet their money on smaller
companies. The thinking is that aggressive, nimble small-caps have
room to grow, whereas the companies that have been around for decades
have cornered most of the market share they're going to corner.
The flip side is volatility. Investing in small companies can be
a wild ride -- not that a giant such as AOL doesn't take you on
a cookie-tossing roller coaster with dips that can last for months.
Small companies are known for reaching euphoric highs and sinking
to heart-stopping lows with blistering speed. One way to lessen
the pain is to diversify -- select stocks in a variety of industries
and ones that span the range of market caps.
But the market is fickle. Blue chips and big tech
companies have dominated a sizable chunk of the current bull run
and often the big gains have been limited to a relatively small
group of large companies. That means thousands of stocks just sit
there, waiting for investor sentiment to change and for said investors
to throw some money their way.
Over the last five years the S&P 500 and the NASDAQ
composite have been winners with investors. The S&P 500 has
averaged annual returns of 24.75 percent. The NASDAQ composite is
a close second with 24.03 percent, followed by the Dow Jones Industrial
Average with 20.7 percent. Meanwhile, the Russell 2000 has slogged
along at 12.6 percent. Not a bad return compared to CDs or bonds,
but a far cry from the chunk of pie the larger companies are grabbing.
If you're interested in small-cap stocks but don't
have time, or don't want to do the ever popular "due diligence,"
consider a small-cap stock fund. Every brokerage company has at
least one -- and there are some index funds, such as the Vanguard
Small Cap (NAESX), Fidelity's
BT Small Cap (BTSCXBTSCX)
and Northern Small Cap (NOSGX)
that aim to match the performance of the Russell 2000.
-- Posted: Nov. 17, 1999
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