✅ Should I trade the Russell 2000?

Because it is a good measure of the broader U.S. economy trading the Russell 2000 is a good choice. It can also be used in certain market conditions when the large cap S&P 500 and Dow indices are underperforming. Historically small cap stocks do outperform the broader market, so it is possible to capture larger moves in the Russell 2000 when it begins trending. And small cap companies tend to do better in low interest environments, and with interest rates at historic lows (and likely to remain there for some time), keeping some interest in the Russell 2000 could work in a trader’s favor.

✅ What’s the best strategy to trade the Russell 2000?

One of the more popular and reliable strategies, which also potentially makes it the best for those looking for winning trades, is to use the Russell 2000 Volatility Index to time entries into long Russell 2000 positions. Typically peaks in the Russell 2000 Volatility Index (look for a 20-day or 50-day peak) make for good opportunities to go long the Russell 2000. Confirmation from a momentum indicator like the RSI gives this trade an even better probability of success.

Russell 2000 Trading

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What is the Russell 2000? | AvaTrade Tutorial

The Russell 2000 chart measures the performance of some 2000+ small-cap companies that are listed on the Russell 3000 Index. The Russell index was founded in 1984, and is associated with the OTC Markets Group, the NASDAQ, and the NYSE. At the time of writing, there were 1983 constituent components in the Russell. A free float capitalisation-weighted method is used for this index.

The Russell 2000 index is regarded as the benchmark index for small-cap stocks in the US. These are the bottom 2000 stocks selected from the constituents of Russell 3000 index, that lists an estimated 3000 of the largest stocks in the US.

The Russell Index is operated by FTSE Russell, of the London Stock Exchange (LSE) Group. While other indices such as the S&P 500 Index are the benchmark for large-US stocks, the Russell is the go-to option for small to mid-cap listed shares on the US market.

By December 31, 2017, the average market cap of companies on the Russell was $2.4 billion, with a median market cap of $861 million. The first time the Russell broke above 1000 was in May 2013.

For trading purposes, the following ticker is used to denote the Russell 2000 index: ^RUT. The index reached an all-time high of 1610.71 (for closing) on January 23, 2018, and hit an intraday high of 1615.52 on January 24, 2018

The performance of the Russell 2000 over time

In recent years, the Russell index has generated outsized gains, in line with the general performance of US bourses. The following annual returns have been reported:

2012 – price return of 14.63% and a total return of 16.35%
2013 – price return of 37.00% and a total return of 38.82%
2014 – price return of 3.53% and a total return of 4.89%
2015 – price return of -5.71% and a total return of -4.41%
2016 – price return of 19.48% and a total return of 21.31%
2017 – price return of 13.14% and a total return of 14.65%

The performance of the bottom 2000 stocks in the Russell 3000 index, i.e. the Russell 2000 index is in line with the overall performance of US equities. It has proven to be a highly lucrative investment opportunity for traders across the board.

Russell composition and calculation

The Russell 2000 index is the biggest small-cap index for trading the bottom 2000 stocks of the Russell 3000 index. Recall that the Russell 3000 index lists the top performing 3000 listed companies in the US. It is rebalanced annually on the last trading day in June. Once this rebalancing takes place, market activity is heightened with a variety of small-cap funds and Russell-tracking funds.

By August 2012, the iShares Russell was the second most actively traded ETF (exchange traded fund) in the world. The top 10 holdings of the Russell index include (as of January 31, 2018): Ralcorp Holdings Inc, Myriad Genetics Inc, Alexion Pharmaceuticals Inc, Waste Connections Inc, Piedmont Natural Gas Company, Inc, Realty Income Corporation and OSI.

The largest 3000 companies in the US market are automatically reconstituted to comprise the Russell 3000 index, and the Russell 2000 index contains the next largest 2000 companies of that index. The largest 1000 companies are listed in the Russell 1000 index. Segmentation is used for index categorization.

Eligible securities for the Russell 2000 index are based on a number of defining characteristics, including:

Home country indicators only
Share descriptions must be compliant
Trading requirements i.e. US exchanges only
A minimum closing price of $1.00 on rank day in May
A minimum total market capitalization of $30 million
A minimum available share/float requirement of 5% +
No royalty trusts, no US limited liability companies, no closed and investment companies
Convertible preferred stock, or preferred stock are excluded

*Note that there are currently 14 Russell US indices available to Australia traders.

Company	Industry	Weight (%)
Cascadian Therapeutics Incorporated	Biotech	0.007%
Eastman Kodak Company	Technology	0.006%
Atara Biotherapeutics	Biotech	0.021%
Iovance Biotherapeutics	Biotech	0.020%
Jounce Therapeutics	Health care	0.011%
RAIT Financial Trust	Financial Services	0.003%
Novelion Therapautics	Biopharmaceutical	0.005%
Novavax	Biotech	0.016%
Madrigal Pharmaceuticals	Biotech	0.009%
PTC Therapeutics	Pharmaceutical	0.039%

*Note: The percentage weightings and the companies that comprise the top 10 performers are subject to daily fluctuation based on data provided by FTSE Russell.

Sector	Weight (%)
Financial services	17.78%
Health care	15.35%
Producer durables	15.38%
Technology	16.64%
Consumer discretionary	12.51%

*Note: The percentage weighting of each of these top 5 sectors is subject to daily fluctuation, based on overall market activity.

The derivative product that is based on the Russell 2000 index is known as the iShares Russell 2000 Index Fund. It tracks the performance of the Russell 2000 chart.

Factors influencing the overall index price of the Russell

Russel 2000 is a broad market index with relatively even sectors representation. As such, macroeconomic variables such as interest rate fluctuations, inflation rate announcements, employment data, manufacturing PMI, nonfarm payrolls and other factors can influence the prices of individual stocks, of sectors, and various other components of the US financial markets.

A myriad of interrelated, unrelated or random factors drives the levels and weightings of individual components and sectors in the Russell 2000 index. Currency strength, particularly in relation with commodities, is a major determinant of demand, given that a strong USD lowers demand for gold, platinum, copper, iron ore and other commodity trading prices, and the reverse can have the opposite effect. The US dollar index is a barometer of dollar strength/weakness and can be used as an economic indicator to gauge the viability of going long or short on the Russell 2000.

A range of factors can determine the level of the Russell 2000, including changing market sentiment, speculative behaviour, market corrections, geopolitical tensions such as North Korea, the Middle East, China etc. These factors combine, sometimes in inexplicable ways, to raise the level of the Russell 2000 index, or to subdue it.

The Russell 2000 remains one of the most attractive small to medium indices for top-performing US companies. It acts as a barometer of the performance of the US markets, and traders can use derivative trading instruments such as CFDs to parallel the movements in the Russell.

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Russell 2000 Trading Main FAQs

What is the Russell 2000?
The Russell 2000 is a market-capitalization weighted index comprised of 2,000 small-cap U.S. stocks. It is often used as a benchmark for the health of small businesses in America. Because of its broad listings some investors prefer it to other indices that are more focused on a specific sector. The 2,000 companies are taken from the bottom of the Russell 3000, an index that includes roughly 98% of all the publically listed U.S. companies. The Russell 2000 is also considered an important bell weather for the U.S. economy since it is focused primarily on domestic companies.
Should I trade the Russell 2000?
Because it is a good measure of the broader U.S. economy trading the Russell 2000 is a good choice. It can also be used in certain market conditions when the large cap S&P 500 and Dow indices are underperforming. Historically small cap stocks do outperform the broader market, so it is possible to capture larger moves in the Russell 2000 when it begins trending. And small cap companies tend to do better in low interest environments, and with interest rates at historic lows (and likely to remain there for some time), keeping some interest in the Russell 2000 could work in a trader’s favor.
What’s the best strategy to trade the Russell 2000?
One of the more popular and reliable strategies, which also potentially makes it the best for those looking for winning trades, is to use the Russell 2000 volatility Index to time entries into long Russell 2000 positions. Typically peaks in the Russell 2000 Volatility Index (look for a 20-day or 50-day peak) make for good opportunities to go long the Russell 2000. Confirmation from a momentum indicator like the RSI gives this trade an even better probability of success.

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