Overview:
Started in 1984, the Russell 2000 Index is a subset of the larger Russell 3000. It is one of the most widely used indexes by investors and is generally accepted as the benchmark for small-cap firms. It includes many newer, smaller firms that are not represented by the S&P 500 or other large indexes.

Composition:
The Russell 2000 Index contains the smallest 2000 stocks (based on market cap) held by the Russell 3000. Though it contains twice as many stocks as the large-cap Russell 1000, because of their small average size, its component stocks account for just 7% of the value of all U.S. equities. The index is computed based on a market cap weighting, meaning that the largest stocks have the greatest influence on the index's returns. The Russell 2000 Index is more evenly weighted than most, as the top 10 holdings represent less than 2% of the index's overall value. The average firm carries a market cap of just under $1 billion, and most stocks within the index range in size from roughly $100 million to $2 billion.

Positives:
The Russell 2000 is the most widely recognized index for small-cap stocks. Though the index contains smaller, more volatile companies, the Russell 2000 has handily outperformed its large-cap peers since its inception. Because of its size and popularity, liquidity and trading costs are not a large concern--many investors actively trade this index.

Drawbacks:
Though it contains a larger number of stocks when compared to the S&P SmallCap 600 Index, many investors are beginning to question whether the Russell 2000 is really a better gauge of the universe of small-cap stocks. The smaller S&P 600 quietly gained a large following thanks in large part to its historical outperformance relative to the Russell 2000.

How can I trade/invest in this index?
Investors can invest in the Russell 2000 Index via a multitude of different futures, options, mutual fund and ETFs. Our favorite choice is the iShares Russell 2000 (symbol IWM). This ETF is not only one of the market's most actively traded funds, but it also carries a very low 0.20% expense ratio. Trading costs are generally higher for small-cap stocks, so IWM provides an excellent way to invest in smaller stocks without paying a huge premium.

Additional Information:
Russell 2000 Index Fact Sheet  
iShares Russell 2000 Index Fund (IWM)