The Russell 2000 Index, a benchmark for 2,000 small-cap U.S. stocks, has shown no growth, posting a stagnant -0.57% year-over-year return as of mid-2025.
What Happened: According to a chart shared by Kevin Gordon, senior investment strategist at Charles Schwab & Co., Inc., "Russell 2000 has made no progress on a y/y basis," highlighting a stark contrast with the S&P 500 index's 12.09% gain over the same period.
The lackluster performance has sparked concerns about the health of small-cap stocks amid a broader market divergence. This comes amid the annual Russell Reconstitution, completed on June 27, which reshuffled the Russell indices.
Jeff Buchbinder, the chief equity strategist at LPL Financial, noted in a recent analysis, "While small caps remain significantly smaller than the $56 trillion large cap market, the Russell 2000 still stands as a major global equity market — larger than the entire equity markets of France, Germany, Canada, and Australia.”
“In fact, if treated as a standalone market, the Russell 2000 would rank as the sixth largest in the world, trailing only the U.S. Russell 1000, China, Japan, the United Kingdom, and India,” he added.
Despite its enormity and significance as highlighted by Buchbinder, the small-cap index has underperformed over the past year. Only the top U.S. companies in the S&P 500, weighted by their market capitalization, have been driving the overall gains.
Buchbinder also highlights that the reconstitution saw a record 2.5 billion shares traded in 0.9 seconds, reflecting $102.4 billion in value, yet small-caps failed to capitalize.
Why It Matters: Meanwhile, the Russell 1000, comprising the largest 1,000 stocks, is thriving, with its top 10 constituents now accounting for $18 trillion of the $55.7 trillion index. This index has returned 12.47% over the past year.
Buchbinder explained that “turnover within indexes remained relatively muted,” despite the reconstitution because the “uptick in volatility on reconstitution day has come down in recent years.”
This happens as FTSE Russell releases preliminary changes nearly two months in advance, allowing institutional investors and traders the ability to adjust their portfolios ahead of time.
"For investors considering adjustments to their portfolios following these changes, we suggest staying patient while keeping in mind that volatility may pick up over the next few weeks around tariff headlines, incoming inflation data, the upcoming earnings season, and historical seasonal weakness," advised Buchbinder.
Price Action: The iShares Russell 2000 ETF IWM, SPDR S&P 500 ETF Trust SPY, and Invesco QQQ Trust ETF QQQ, which track the Russell 2000, S&P 500, and Nasdaq 100 indices, respectively, were mixed in premarket on Thursday.
The IWM was down 0.27% to $220.43, SPY was up 0.03% at $624.41, while the QQQ advanced 0.17% to $558.23, according to Benzinga Pro data.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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