Most index investors focus on well-known benchmarks like the S&P 500 and Nasdaq 100, but these tend to have a major shortcoming: they only hold large- and mid-cap stocks.
Both the S&P 500 and Nasdaq 100 exclude small-cap stocks, which are those with market capitalizations of anywhere from $250 million to $2 billion. Although these stocks form a relatively small part of most market-cap-weighted indexes, 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 compared to their large-cap cousins. Because small-cap stocks tend to be riskier and under-invested compared to their large-cap counterparts, they offer the potential for higher returns.
To track small-cap stocks, many organizations have developed indexes, with a famous one being the Russell 2000 index. Investors looking for affordable and transparent exposure to small-cap stocks can invest in a range of Russell 2000 exchange-traded funds (ETFs).
This article will teach you all you need to know about the different Russell 2000 ETFs out there and the ins and outs of investing in them.
What Are Russell 2000 ETFs?
The Russell 2000 index is managed by FTSE Russell as its flagship small-cap U.S. equity index. Currently, it tracks the 2,000 smallest U.S. companies by market cap. Every year, the index is reconstituted to ensure it stays representative of the U.S. small-cap market.
Investors interested in investing in the Russell 2000 index can buy Russell 2000 ETFs. This type of ETF holds a basket of stocks weighted to mirror the composition of the Russell 2000 index. Shares of these Russell 2000 ETFs trade on stock exchanges under their own tickers like stocks do.
By investing in a Russell 2000 ETF, investors receive exposure to the returns and risks of the underlying Russell 2000 index. While a Russell 2000 ETF will closely follow the performance of the index, it may not be exact. Factors like the ETF's expense ratio, portfolio turnover, taxes and transaction costs can cause it to lag slightly over time. This difference between the ETF's returns and the index's returns is called tracking error. Keeping this minimal is best.
When looking for the ideal Russell 2000 ETF, investors should prioritize ones with excellent liquidity, strong daily trading volume and high assets under management. Additionally, low tracking errors and minimal expense ratios are also important factors to consider. By keeping 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 Russell 2000 ETF archetype is popular among U.S. investors. Here's a breakdown of some of the more common types of Russell 2000 ETFs you may encounter, along with notable ETF examples for each:
- Normal: Russell 2000 ETFs of this type hold all the stocks in the Russell 2000 index with a normal market-cap-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).
- Leveraged: These exotic Russell 2000 ETFs provide magnified exposure to the returns of the Russell 2000 index. For instance, 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 holds. They tend to have higher expense ratios than basic Russell 2000 ETFs along with much greater volatility.
- Inverse: Inverse Russell 2000 ETFs aim to deliver a daily return opposite that of the Russell 2000 index. For example, the ProShares Short Russell 2000 ETF (NYSEARCA: RWM) targets 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 shorting or buying put options.
- Covered call: These ETFs hold the stocks in the Russell 2000 index and sell call options to generate extra income. By doing so, covered call ETFs aim to convert their total return potential into higher-than-average current income. These ETFs are generally used by income investors seeking high yields. The Global X Russell 2000 Covered Call ETF (NYSEARCA: RYLD) is an example of a covered call Russell 2000 ETF.
Benefits of Russell 2000 ETFs
When it comes to passively indexing small-cap stocks, Russell 2000 ETFs offer a variety of benefits:
- Low fees: Some Russell 2000 ETFs like IWM and VTWO charge a 0.20% expense ratio. For a $10,000 investment, this works out to around $20 in fees, which is still relatively low compared to actively managed mutual funds.
- High liquidity: Russell 2000 ETFs like IWM have substantial assets under management, daily traded volume and narrow bid-ask spreads, which makes it easy for investors to enter and exit positions. They also offer options trading.
- Popularity: The Russell 2000 is a benchmark for investors looking for exposure to small-cap U.S. stocks. Therefore, investors looking to match the performance of this index can use it as a core holding.
Drawbacks of Russell 2000 ETFs
Not all investors find a Russell 2000 ETF to be an appropriate investment. Like any other investment, a Russell 2000 ETF also possesses certain risks and drawbacks. Some of these cons include:
- Limited exposure to large-cap stocks: The Russell 2000 index includes only small-cap stocks, which may not be suitable for investors who seek exposure to the returns of large-cap stocks, which comprise a substantial portion of the market.
- Higher volatility: The Russell 2000 index is considered to be more volatile than the S&P 500 index because of its small-cap nature, which may not be suitable for all investors. Investors who buy these ETFs should be prepared to withstand market fluctuations and significant price movements.
- Geographical concentration: Like the S&P 500 index, the Russell 2000 index only holds U.S. stocks. Investors who buy a Russell 2000 ETF miss out on international stocks from around the world, which can provide diversification benefits and reduce overall portfolio risk.
Compare Russell 2000 ETFs
| Ticker | Company | ±% | Price | Invest | ||
|---|---|---|---|---|---|---|
| INSP | Inspire Medical Systems | 1.1% | $186.80 | Buy stock | ||
| IWN | iShares Russell 2000 Value ETF | 1.58% | $175.61 | Buy stock | ||
| SRTY | ProShares UltraPro Short Russell2000 | -5.09% | $16.23 | Buy stock | ||
| URTY | ProShares UltraPro Russell2000 | 5.12% | $60.38 | Buy stock | ||
| TNA | Direxion Small Cap Bull 3X Shares | 5.1% | $51.30 | Buy stock | ||
| RWM | ProShares Short Russell2000 | -1.68% | $17.88 | Buy stock | ||
| UWM | ProShares Ultra Russell2000 | 3.38% | $47.76 | Buy stock | ||
| IWM | iShares Russell 2000 ETF | 1.7% | $234.86 | Buy stock | ||
| VTWO | Vanguard Russell 2000 ETF | 0.54% | $93.93 | Buy stock | ||
Compare ETF Brokers
Investors looking to research and choose the best Russell 2000 ETFs can use Benzinga to compare the available selections available on the market. This ETF type has many available options, so it's important to do your research before committing your money to a specific one. Here is a list of brokers that support Russell 2000 ETF trading and offer research tools to help investors select the right one.
- Best For:Active and Global TradersVIEW PROS & CONS:Securely through Interactive Brokers’ website
Frequently Asked Questions
Are Russell 2000 ETFs a good idea?
Investing in a Russell 2000 ETF can be a good idea for some investors, but it depends on their goals and tolerance for risk. These ETFs are heavily concentrated in terms of market cap and geography. If your objective is to invest in smaller U.S. companies that are not included in the S&P 500, then a Russell 2000 ETF might be a good choice, as they offer transparency, liquidity and affordability. However, if you prefer a more diversified portfolio and want to reduce volatility, then you may want to consider a broader market index ETF that includes both small-cap and large-cap stocks, international stocks and perhaps an allocation to high-quality bonds.
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 possess much greater volatility than bonds. These ETFs have a significant focus on small-cap stocks, which are much risker and more volatile than large-cap stocks. Investors who choose to invest in Russell 2000 ETFs must be prepared to endure substantial losses, with the possibility of losing 50% or more of their investment. Historically, the underlying Russell 2000 index has experienced substantial losses during previous market downturns, like during the 2008 Great Recession.
About Tony Dong
Tony Dong, MSc, CETF®, is a seasoned investment writer and financial analyst with a wealth of expertise in ETF and mutual fund analysis. With a background in risk management, Tony graduated from Columbia University in 2023, showcasing his commitment to continuous learning and professional development. His insightful contributions have been featured in reputable publications such as U.S. News & World Report, USA Today, Benzinga, The Motley Fool, and TheStreet. Tony’s dedication to providing valuable insights into the world of investing has earned him recognition as a trusted source in the finance industry. Through his writing, he aims to empower investors with the knowledge and tools needed to make informed financial decisions.