How the Russell 3000 Index Works
Introduced in 1984, the Russell 3000 Index tracks the current and historical market performance of large-, mid-, small-, and micro-cap companies. Since it tracks U.S. companies, the index can be used as a performance benchmark for the overall domestic economy. The Russell 3000 Index is a subset of the larger Russell 3000E index—an index of the largest 4,000 U.S. companies. Within the Russell 3000 Index, there are also subsets, including the Russell 2000 and Russell 1000:
Russell 2000: The 2,000 smallest companies listed in the Russell 3000—often used to track the performance of small-cap companies.Russell 1000: The largest 1,000 companies in the Russell 3000—often used to track the large-cap U.S. companies.
The FTSE Russell uses objective criteria to accurately measure performance and economic risks. To begin, all securities must be tradable on the following U.S. exchanges: Cboe, NYSE, NYSE American, NASDAQ, or NYSE Arca. Certain company structures are restricted from inclusion, such as SPACs, limited liability companies, royalty trusts, and business development companies. Other qualifying criteria to be considered for inclusion in the index include (but are not limited to) closing price, total market capitalization, and available shares.
Closing price: Security closing prices must be at or above $1 on the day the index ranks companies. If it is less than $1, the average daily closing price during the last 30 days must be equal to or higher than $1. Total market capitalization: Companies must have a total market capitalization of $30 million or above to be considered for inclusion. Available shares: Companies must have at least 5% of their shares available in the marketplace.
Russell Reconstitution
Russell US indexes are updated annually to keep pace with the ever-changing U.S. equity market. This process of rebuilding the Russell indexes is called reconstitution. The FTSE announces the specific date in May that the reconstitution will occur. Eligible securities are ranked against the criteria mentioned above. There may be deletions of companies that made it the previous year and there may be new additions.
Russell 3000 vs. S&P 500
The Russell 3000 and S&P 500 are considerably different in the number of stocks they include, the market cap of companies they include, and their methodology for including companies.
What It Means for Individual Investors
The Russell 3000 Index is not as widely known as other types of indexes. Ted Parchman, principal at Truepoint Wealth Counsel, told The Balance in an email that he encourages more investors to reference the Russell 3000. “In reality, I would love to have everyone focused on the Russell 3000 as opposed to the S&P 500 or the Dow because it is a more complete (but not comprehensive) U.S. market index,” Parchman said. “The challenge is that even if I reference this with my clients, they are still going to anchor to the S&P 500 and the Dow because this is what they see on the news every day.” Parchman explained that the Russell 3000 is a better indicator because the index is larger and more diverse. “In total, there are more than 4,000 stocks traded in the U.S,” he said. “The Dow only tracks 30 large companies…and the S&P 500 index only tracks 500 of the largest companies. Both indexes completely ignore many small and mid-size companies.”
