The Russell 2000 And You

Written by GSCR Staff   
Thursday, 27 December 2012 02:00

We frequently refer to indices, metrics and benchmarks. In fact, we refer to them so often sometimes their makeup and importance become lost in the grand scheme of things. For the sophisticated and novice investor, here is a short primer on the most meaningful index to our world, the Russell 2000 Index.

As its name suggests, the Russell 2000 Index is a composite of 2,000 stocks in the small-cap space.  The index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index.

The average weighted market capitalization of a Russell 2000 index member stock is around $1.3 billion, while the median market cap is $500 million. In a strange twist, the largest stock in the index carries a market cap approaching $5 billion, which is more akin to a midcap stock than a traditional small cap stock.

The index itself actually trades on the Chicago Board Options Exchange with the symbol ^RUT and iShares has an ETF that tracks the index listed as IWM.  Most small cap mutual funds use this as a benchmark for performance for their small-cap funds rather than the S&P 600 Index due to its diverse holdings.  Moreover, many market strategists, prognosticators and economists refer to and use this index as a measure of the current risk appetite among investors, since small-cap stocks are generally riskier than their larger cap brethren.

The Russell 2000 has had a steady, but volatile climb from a low of 390 in February 2009 to the 825 range today (it closed at 838 yesterday).  The volatility is palpable. During 4Q12 alone, the index has dropped from 840 down to 770 only to return to 840 again.  Figure 1 and Figure 2 show the one year and five year charts respectively.  The charts show a generally favorable uptrend despite the volatility.

Figure 1: 1 Year Performance of Russell 2000 Index (^RUT)

blogimage1

(Source: Yahoo! Finance)

 

Figure 2: 5 Year Performance of Russell 2000 Index (^RUT)

blogimage2

(Source: Yahoo! Finance)

 

So what does the Russell 2000 Index mean for the John and Jane Doe investor or Goldman Small Cap Research subscriber?  As a trader or investor in small-cap stocks, one should use the Russell 2000 index to determine if/when there is real accumulation in this space, which usually results in broad-based stock price increases and gains. 

Currently, the trend is definitely representing accumulation in this space.  With few investments offering real returns and growth returning in key sectors, the near term future appears bright.  The current over-weighting in financial services and consumer discretionary stocks, along with a lower weighting in health care, give us a clue as to what may/may not perform heading into 1Q13. With a reconstitution of the index slated for mid-2013, it will be interesting to see how it all shakes out. Considering the expectation that small banks could be major M&A targets in 2013, we may elect to turn our attention to that segment and rise the M&A and Russell 2000 Index waves.

Disclosure: Goldman Small Cap Research analysts are neither long nor short stocks mentioned in this blog but may elect to purchase the stocks within the next 48 hours.

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