breaking news Russell 2000 ETF Quick Guide • Benzinga
Most index investors focus on well-known benchmarks like the S&P 500 and Nasdaq 100, but these tend to have one major flaw: they only hold large and mid-cap stocks.
The S&P 500 and Nasdaq 100 exclude small cap stocks, which are those with a market capitalization between $250 million and $2 billion. Although these stocks make up a relatively small share of most market-cap-weighted indices, they can be lucrative investments for high-risk investors.
The presence of a size value factor is well documented, referring to the historically higher returns of small-cap stocks relative to their large-cap cousins. Since small cap stocks tend to be riskier and underinvested than their large cap counterparts, they offer the potential for higher returns.
To track small cap stocks, many organizations have developed indices, one famous of which is the Russell 2000 Index. Investors looking for affordable and transparent exposure to small cap stocks can invest in a range of funds exchange-traded (ETF) Russell 2000.
This article will teach you everything you need to know about the different Russell 2000 ETFs and the ins and outs of investing in them.
What are Russell 2000 ETFs?
The Russell 2000 Index is managed by FTSE Russell as the flagship index of US small cap stocks. Currently, it tracks the 2,000 smallest US companies by market capitalization. Each year, the index is reconstituted to ensure that it remains representative of the US small cap market.
Investors interested in investing in the Russell 2000 Index can purchase Russell 2000 ETFs. This type of ETF holds a basket of stocks weighted to reflect the composition of the Russell 2000 Index. The stocks of these Russell 2000 ETFs trade traded under their own symbols as stocks do.
By investing in a Russell 2000 ETF, investors are exposed to the returns and risks of the underlying Russell 2000 Index. Although a Russell 2000 ETF closely tracks the performance of the index, it may is not exact. Factors such as the ETF’s expense ratio, portfolio turnover, taxes, and transaction costs can cause a slight lag over time. This difference between the returns of the ETF and the returns of the index is called tracking error. Keeping this minimum is best.
When looking for the ideal Russell 2000 ETF, investors should prioritize those with excellent liquidity, high daily trading volume and high assets under management. Additionally, low tracking errors and minimal expense ratios are also important factors to consider. With these points in mind, investors can find the ideal Russell 2000 ETF that offers the best balance of these factors.
Types of Russell 2000 ETFs
The archetypal Russell 2000 ETF is popular among US investors. Here’s a breakdown of some of the more common types of Russell 2000 ETFs you may come across, along with notable ETF examples for each:
- Normal: Russell 2000 ETFs of this type hold all stocks in the Russell 2000 Index with a normal market capitalization-weighted approach. These ETFs are ideal if you want to match the performance of the Russell 2000 Index as closely as possible. They tend to have the lowest fees, highest liquidity and minimal portfolio turnover. Some examples of basic Russell 2000 ETFs include the iShares Russell 2000 ETF (NYSEARCA: IWM) and the Vanguard Russell 2000 ETF (NASDAQ: VTWO).
- Leverage : These exotic Russell 2000 ETFs offer magnified exposure to the returns of the Russell 2000 Index. For example, the Direxion Daily Small Cap Bull 2X Shares ETF (NYSEARCA: SMLL) and the ProShares UltraPro Russell 2000 ETF (NYSEARCA: URTY) seek to provide a daily return 2x and 3x that of the Russell 2000 Index respectively. Leveraged ETFs are intended for short-term trading and are not suitable for long-term holdings. They tend to have higher expense ratios than the base Russell 2000 ETFs, as well as much greater volatility.
- Reverse: Russell 2000 Inverted ETFs aim to provide a daily return opposite that of the Russell 2000 Index. For example, the ProShares Short Russell 2000 ETF (NYSEARCA: RWM) aims for a daily return of -1x the Russell 2000 Index. Inverse ETFs are also short-term trading instruments used by investors who want to bet against the performance of the Russell 2000 Index without going short or buy put options.
- Covered call: These ETFs hold the stocks of the Russell 2000 Index and sell call options to generate additional income. In doing so, covered call ETFs aim to convert their total return potential into above-average current income. These ETFs are typically used by income investors seeking high returns. THE Global X Russell 2000 Covered Call ETF (NYSEARCA: RYLD) is an example of a Russell 2000 Covered Call ETF.
Advantages of Russell 2000 ETFs
When it comes to passively indexing small cap stocks, Russell 2000 ETFs offer a variety of advantages:
- Reduced fees: Some Russell 2000 ETFs like IWM and VTWO charge an expense ratio of 0.20%. For a $10,000 investment, that equates to about $20 in fees, which is still relatively low compared to actively managed mutual funds.
- High liquidity: Russell 2000 ETFs like IWM have large assets under management, daily trading volume and narrow bid-ask spreads, allowing investors to easily enter and exit positions. They also offer options trading.
- Popularity: The Russell 2000 is a benchmark for investors seeking exposure to US small cap stocks. Therefore, investors looking to match the performance of this index can use it as a base holding.
Disadvantages of Russell 2000 ETFs
Not all investors find a Russell 2000 ETF a suitable investment. Like any other investment, a Russell 2000 ETF also has certain risks and disadvantages. Some of these disadvantages include:
- Exposure limited to large caps: The Russell 2000 Index only includes small cap stocks, which may not be suitable for investors seeking exposure to the returns of large cap stocks, which represent a substantial portion of the market.
- Higher volatility: The Russell 2000 Index is considered more volatile than the S&P 500 Index due to its small capitalization nature, which may not be suitable for all investors. Investors buying these ETFs should be prepared to withstand market fluctuations and large price movements.
- Geographic focus: Like the S&P 500 Index, the Russell 2000 Index only holds US stocks. Investors buying a Russell 2000 ETF are missing out on international stocks from around the world, which can provide diversification benefits and reduce overall portfolio risk.
Compare Russell 2000 ETFs
Compare ETF Brokers
Investors looking to research and choose the best Russell 2000 ETFs can use Benzinga to compare the selections available in the market. This type of ETF has many options available, so it’s important to do your research before committing your money to a specific type. Here is a list of brokers that support Russell 2000 ETF trading and offer research tools to help investors choose the right one.
Frequently Asked Questions
Are Russell 2000 ETFs a good idea?
Investing in a Russell 2000 ETF may be a good idea for some investors, but it depends on their goals and risk tolerance. These ETFs are highly concentrated in terms of market capitalization and geography. If your goal is to invest in smaller US companies that aren’t included in the S&P 500, a Russell 2000 ETF might be a good choice because it offers transparency, liquidity, and affordability. However, if you prefer a more diversified portfolio and want to reduce volatility, you might consider a broader index ETF that includes both small and large cap stocks, international stocks and perhaps a bond allocation. High quality.
Are Russell 2000 ETFs a safe investment?
Russell 2000 ETFs are not considered a safe investment. A safe investment would be something along the lines of short-term Treasury or money market ETFs. As a 100% equity investment, Russell 2000 ETFs are highly exposed to market fluctuations and have much greater volatility than bonds. These ETFs emphasize small cap stocks, which are much riskier and more volatile than large cap stocks. Investors choosing to invest in Russell 2000 ETFs should be prepared to sustain substantial losses, with the possibility of losing 50% or more of their investment. Historically, the underlying Russell 2000 Index has suffered significant losses during previous market declines, such as during the Great Recession of 2008.