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What Is Russell 2000 and How Does It Differ from S&P 500? | R Blog


This overview is devoted to a popular stock index Russell 2000: its contents, its differences from the S&P 500, and ways of trading it.

What is Russell 2000?

The Russell 2000 index (US Small Cap 2000) is one of the leading global indices based on the stock prices of 2,000 companies with small capitalization traded in the USA. The index was created in 1984 by the Frank Russell Company, a part of the London Stock Exchange. Russell 2000 is called a wide market index among small companies as it represents stock price dynamics of tier 2 and 3 companies.

The Russell family consists of several indices, the most famous of them being:

  • Russell 3000 is an index based on the stock prices of 3,000 largest public companies registered in the USA. Their overall capitalization makes up for 97% of the American stock market.
  • Russell 2000 is an index consisting of 2,000 smallest companies of the Russell 3000 index.
  • Russell 1000 is an index that tracks 1,000 stocks with the highest rating from Russell 3000.

Russell 2000 is the most popular index among investors who hold shares of companies with small capitalization. Investors usually track this index to assess the market efficacy of small enterprises, mostly working for the domestic market. As long as there are so many companies in the index, your portfolio automatically diversifies.

Leading companies of Russell 2000 include startups in the spheres of healthcare, food, and consumer goods. Russell 2000 is calculated based on capitalization-weighed stock price of all the companies in it. The index gets revised every year, some companies being removed from and some added to it.

How does Russell 2000 differ from S&P 500?

These two indices have both differences and common features. S&P 500 is a wide market index that includes companies with the highest capitalization, while Russell 2000 is a wide market index with a low capitalization. The main differences are as follows:

  • The number of companies: S&P 500 uses the shares of 500 largest companies, and Russell 2000 – the shares of 2000 smaller ones.
  • Capitalization of companies: S&P 500 tracks the leading companies; it is meant for investors who hold the shares of large enterprises. Russell 2000 demonstrates the state of affairs in small companies; it is meant for investors who hold small but promising shares in their portfolios.
  • Volatility: depending on the current market conditions, the volatility of S&P 500 and Russell 2000 may differ. At certain times, one index demonstrates better volatility, while the other comes to the scene as soon as the situation changes.

On the whole, regardless of all the differences, S&P 500 and Russell 2000 have been showing similar dynamics.

Comparison of Russell 2000 and S&P 500 dynamics
Comparison of Russell 2000 and S&P 500 dynamics

How to trade Russell 2000

First of all, Russell 2000 is a most popular investment instrument but it can be used for short-term trading as well. Thanks to a wide range of instruments (ETFs, futures, options, CFDs) for trading Russell 2000, different strategies may be used.

Investing

One of the most popular ways of dealing with the index is long-term and medium-tem investments. It is rather difficult to gather such a vast portfolio (of 2,000 stocks) on your own. Hence, the most popular investment instrument here is ETF. And one of the most popular ETFs on Russell 2000 is iShares Russell 2000 ETF (IWM).

Example:

During the crisis of 2020, iShares Russell 2000 ETF (IWM) dropped to $94. You could buy this ETF after it stopped falling and started recovering. Later its growth exceeded 100%, reaching $234.

The chart of iShares Russell 2000 ETF (IWM) ETF for 2020-2021
The chart of iShares Russell 2000 ETF (IWM) ETF for 2020-2021

Trading by tech analysis

Trading by tech analysis implies detailed analysis of the Russell 2000 chart. Use classic tech analysis instruments: trendlines, support and resistance levels, price patterns, candlestick patterns, Price Action – and various original methods: Elder Three Screens, Wolfe Waves, Joe Ross Hooks, and other popular strategies by market gurus.

Example:

  • When the index was growing in July 2020, the price formed a Triangle on the chart;
  • When the price line broke through the pattern upwards, you could open a buying position, counting on further growth of the quotations.
Tech analysis of the Russell 2000 index
Tech analysis of the Russell 2000 index

Trading by indicators

For trading Russell 2000, you can use various indicators: just a single indicator or a whole trading system. Depending on your timeframe and strategy, you can make both short-term and long-term trades.

Example:

  • Let us take trading with the Moving Average (200); if the price secures above the indicator, it signals to buy; if it secures below – it signal to sell;
  • On D1 of Russell 2000 for August 2020, the quotations secured above the SMA (200) line. Then it corrected to the indicator line and bounced off it upwards.
  • Right after the bounce forms, you could open a buying position, counting on further growth of the index.
Indicator analysis of the Russell 2000 index
Indicator analysis of the Russell 2000 index

Closing thoughts

The Russell 2000 index is calculated using weighed market capitalization of the stock price of 2,000 small companies, trading in the USA. This is one of the leading global indices that indicates the situation with a wide range of companies with small capitalization. Investing is a popular strategy of trading this index but it also suits short-term trading.

Material is prepared by

Has traded in financial markets since 2004. The knowledge and experience he has acquired constitute his own approach to analyzing assets, which he is happy to share with the listeners of RoboForex webinars.

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