What Is Russell 2000 In Trading

The Russell 2000 index gives traders entry to the small-cap market in the US. However, trading small market capitalisation indices has its own challenges compared to trading major indexes of large-cap companies.

Also known as the USA 2000 (RTY) or US2000 index, the Russell 2000 stock index is complicated as it is sensitive to broader market forces as well as company news. Although this is also the case with larger companies, Russell 2000 history shows that small caps are inherently more volatile. While they may deliver growth, they can also lead to significant losses.

For small-cap traders, being aware of the risks of trading in US small-cap stock indexes that feature lower liquidity may be positive, but it also calls for informed decision-making. Therefore, to trade US2000 while considering its risks, one shall have a solid understanding of various factors influencing its price, including market dynamics, industry trends, and the construction of the Russell 2k index itself.

This article aims to supply traders with the knowledge to engage with the Russell 2000 more mindfully by examining:

• The index's nature and importance for traders
• The influences on Russell 2000’s prices
• How to trade the Russell 2000 stock index
• Buying or selling of Russell 2000 CFD index

What Is the Russell 2000 Index (USA 2000)?

The USA 2000 index, ticker symbol RTY, is a small-cap index that tracks the performance of approximately 2000 small-cap stocks that are publicly traded in the United States domestic market. It is a subset of the Russell 3000 index, meaning the largest 2000 companies by market cap included in the broader Russell 3000 index are components of the Russell 2000 index. The Russell 2000 constituents market cap range is between $300 million and $2 billion.

Stocks in the Russell 2000 index represent about 10% of the entire market in the US, making it one of the stock indexes deemed important for monitoring overall market performance.

Why Is It Called the Russell 2000?

The Russell 2000 was created in 1984 by the Frank Russell Company to provide a benchmark for small-cap stocks. It takes its name from its founder, Frank Russell. The Russell 2000 is one component of the broader range of Russell indexes managed by FTSE Russell, a subsidiary of the London Stock Exchange Group (LSEG-L).

How Is the Russell 2000 Price Calculated?

The Russell 2000 price is calculated using a specific Russell 2000 index methodology known as the free-float market capitalisation-weighted index methodology. This means Russell 2000 constituents with larger caps influence the index's performance more. Each company's market capitalisation is calculated by multiplying the share price by the number of outstanding shares available in the free float:

Free Float Method = Share Price x (Number of Shares Issued – Locked-In Shares)

It is important to note that the list of companies included in the US2000 index changes annually to include or exclude companies entering or falling outside the required market capitalisation limits and other criteria.

When Does Russell 2000 Rebalance?

The index is subject to the Russell 2000 index rebalancing process every June to ensure all its constituents are represented at current market values. Qualified companies may be included in the USA 2000 during the stage as smaller capitalisation companies get removed, provided they were initially listed on the Russell 3000 index.

The Russell 2000 index reconstitution results in increased trading volumes even ahead of June as funds start to adjust their portfolio of stocks to reflect the new Russell 2000 companies.

This procedure can impact demand for individual Russell 2000 stocks depending on inclusion or removal from the index. In fact, research published in the Financial Analysts Journal found that stocks removed from the US stock index, on average, outperformed those freshly added by 0.67% per month over the first year after the change.

What Influences the Price of Russell 2000?

The prices of the RTY stocks in the index can be impacted by wider economic trends, key economic data, investor sentiment, and shifts in the business cycle. However, as they are more sensitive to a variety of factors across the whole economy, industries, and individual Russell 2000 constituents, in addition to changes in its composition and performance from the reconstitution in June, index traders may also want to consider the following:

• Macroeconomic factors: interest rates, inflation, GDP growth, political events.
• Industry-specific factors: tech industry improvements, regulatory changes, consumer patterns.
• Company-specific factors: earnings reports, management changes, mergers and acquisitions.
• Liquidity issues: small cap stocks are less liquid than large-cap stocks, making them more difficult to trade.

What Russell 2000 Companies Make Up the Index?

The US2000 is considered the premier small-capitalisation stock market index, focusing specifically on smaller companies in the US. It comprises America's 2000 largest small-cap stocks, making a list of Russell 2000 stocks impractical to detail individually in this article.

Some past examples of popular small-cap stocks in the USA 2000 index include Nikola (NKLA), Marathon Digital (MARA), Riot Blockchain (RIOT), Virgin Galactic (SPCE), JetBlue Airways (JBLU), C3.ai (AI), Xerox (XRX) and First Bancorp (USB).

Due to notable gains in 2024, the largest contributions in the Russell 2000 were Super Micro Computer (SMCI) and MicroStrategy (MSTR). Combined, the two largest stocks, which one can call the best Russell 2000 stocks in terms of performance, positively contributed 1.42% to the index's 5.4% year-to-date (YTD) losses as of April 2024.

Russell 2000 top performers SMCI and MSTR boasted a market cap of $44 billion and $21 billion, respectively, as of May 2024. These two stocks in the Russell 2000 index had a much higher market cap than the median Russell 2000 index market cap per stock, which was approximately $1 billion as of March 2024.

The two largest constituents will likely be removed from the Russell 2000 come June. They may join the Russell 1000 index when it undergoes its annual rebalancing, allowing trading of the revised Russell 2000 to commence in July.

Russell 2000 Sectors

The Russell 2000 index components feature multiple sectors, including industrial, financial, healthcare, technology, discretionary, energy, real estate, materials, consumer discretionary, utilities, and communications services.

Industrials, financials (excluding banks), and healthcare had the biggest Russell 2000 sector weights, representing over 49% of the index, according to Yahoo Finance.

Russell 2000 Index Weighting

Why Is the Russell 2000 Important for Traders?

The Russell 2000 index provides useful insight for traders as they may monitor market trends and adjust their Index trading strategies. The index serves as an important research tool due to several factors:

• Economic indicator: Traders find the USA 2000 useful for assessing the economy's overall health since small-cap companies tend to react more quickly to economic changes.
• Market strength measurement: Due to its extensive coverage, RTY serves as a key resource for traders evaluating the strength and direction of the wider market.
• Predictive abilities: The Russell 2000 historical performance of leading other indexes has made it a preferred instrument for anticipating market movements.
• Exposure to cyclical and value stocks: Its composition helps traders capitalise on periods of economic growth and expansion when small-cap companies in the index focused on cyclical and value investing may outperform.
• Long-term outperformance: The Russell 2000 historical returns show a track record of exceeding large-cap returns over the long run, which is a primary reason traders use it as a benchmark index for small-cap stocks.
• Valuation opportunities: Near-record discounts of small-cap index valuations relative to large caps offer the potential for better Russell 2000 performance, attracting value-oriented traders.
• Leverage in bull markets: Traders look to the US2000 early in bull markets, as small caps tend to deliver better gains at the start.

Why Trade Russell 2000

There are various reasons why traders may choose to get involved in USA 2000 trading. The key points provide clarity on the potential benefits and risks of trading small-cap companies:

Small-Cap Appeal

Small-cap stocks can be favourable when the US economy is stable with low debt levels and a positive yield curve.

Diversification

RTY trading provides diversification benefits across industries like healthcare, industrials and financials. The USA 2000 index's top ten holdings represent only 3% of the total market cap compared to the S&P 500’s 30%, reducing concentration risk.

Market Insights

Tracking the RTY index can provide insights into small-cap segments and stock health and growth.

Hedging Risk

Small-caps in the Russell 2000 may be less impacted than large-caps by geopolitical risks like trade disputes, offering downside protection.

How To Trade Russell 2000 with Plus500

RTY trading through Plus500 is offered via Contracts for Difference (CFDs). CFDs are leveraged products that allow traders to speculate on RTY price fluctuations without owning the asset. CFD index trading requires a relatively small capital compared to the position's allowed size, yet losses are also amplified apart from profit potential.

Plus500 indices trading features various trading types on Russell 2000 CFDs linked to futures contracts. Small cap traders can trade via Russell 2000 index CFDs, exchange-traded fund (ETF)* CFDs and share CFDs to gain exposure to the underlying USA 2000 index and components.

Russell 2000 Index CFDs

Russell 2000 index CFDs are derivatives that allow price speculation on RTY without holding the constituent stock. They involve an agreement between the trader and broker to trade the Russell 2000 value difference at the opening and closing of a predefined position.

Russell 2000 ETF CFDs*

Russell 2000 ETF CFDs are based on ETF prices tracking the RTY index. Unlike futures CFDs, ETF CFD trading typically lacks expiration dates, allowing unlimited holding subject to margin and overnight funding costs. CFDs are offered on Russell ETFs like the iShares Russell 2000 Value ETF (IMW) and iShares Russell 2000 Growth ETF (IWO) or the inverse ProShares UltraShort Russell 2000 ETF (TWM). These track the Russell 2000 value index, the Russell 2000 growth index and the TWM two-time inverse ETF.

Russell 2000 Stock CFDs*

Plus500 CFD trading of RTY stocks allows speculating on individual stock price moves within the USA 2000 index. Unlike index CFDs, which reflect all constituent Russell 2000 companies, a stock CFD focuses on a company's share performance individually.

As with all types of trading, Russell 2000 CFD trading inherently poses a high loss risk due to leverage. By understanding the different available CFD types and potential risks, traders may tweak their Plus500 Russell 2000 strategy to suit trading objectives and risk tolerance.

How Does the Plus500 Russell 2000 Index CFD Work?

Plus500 Russell 2000 CFDs are based on the specifications of futures contracts, which means they have set expiration dates upon which their positions will be rolled over to the next future contract if they are not closed by the trader before that date.

Overall, traders must understand all details of a futures-based CFD contract and what CFD indices are, including expiration dates, rollover procedures and associated trading costs from USA 2000 trading. Here is a breakdown of how the USA 2000 CFD typically functions, featuring some RTY contract specs:

Underlying Asset: The Russell 2000 CFD is based on the Russell 2000 index.

Leverage: Leverage means a trader can control a large position with a relatively small capital investment, but it also increases both potential profits and carries a high degree of loss risks.

Maintenance Margin: To keep a position open, a small-cap index trader must maintain a certain level of funds in their account, settled at a 10% initial*margin at Plus500. Positions may be automatically closed if the account equity falls below a specified percentage, such as 50% of the Initial Margin.

*Subject to regulation

Rollover: Plus500 index CFDs are based on futures contracts and may undergo an automatic rollover, which transfers the position to the next contract when the current one expires without closing the position. Plus500 makes adjustments to reflect rate differences between contracts. The current May RTY futures contract will automatically rollover in June 2024.

Risk: Trading CFDs is considered high risk. For Plus500, the risk measure for CFDs is very high risk.

Costs: Trading CFDs involves spreads, overnight funding fees, and potential currency conversion fees.

Going Long or Short: A trader can speculate on the price of RTY moving up (going long) or down (going short). If a trader believes RTY will increase, they open a Buy. If they think it will decrease, they open a Sell position.

Settlement of Contracts: The contract pays out the difference between RTY's opening and closing prices. If the index moves in the trader's favour, they make a profit; if it moves against them, they incur a loss.

How to Buy or Sell Russell 2000 Index on Plus500

Trading RTY can provide broad exposure to small-cap US equities. The following steps outline how to buy the Russell 2000 index or sell it:

1. Register with Plus500: Sign up and verify your account on the Plus500 platform.
2. Deposit Funds: Complete identity verification and fund the account for Russell 2000 CFD margin requirements.
3. Access the Trading Platform: Log into the Plus500 webtrader, the Plus500 trading platform.
4. Locate the Russell 2000 Index CFD: Utilise the search tool to locate "RTY".
5. Analyse and Decide: After analysing the Russell 2000 chart, assess the market conditions and decide whether to buy (go long RTY) or sell (go short RY) the USA 2000 index.
6. Russell 2000 Buy or Sell: Place the trade by setting the position size and any attached orders and executing the buy or sell instruction. A long position results from buying on the expectation of price increases.
7. Monitor and Manage: Monitor any Russell 2000 news, how your position fares, and make adjustments where needed.
8. Close Position: Close the position either manually or automatically upon predetermined criteria being met.
9. Review: Review the completed RTY trade after closing to inform future strategies.

Put your trading strategy into action today

Conclusion

The Russell 2000 index may provide opportunities for small-cap traders looking to diversify into a different subset of small-cap public companies. This segment may hold much growth potential but also huge risks and demands close risk oversight, which is especially relevant for day trading small cap stocks.

Trading CFDs on the Russell 2000 today allows leveraged access to profit from price movements but requires stringent risk management measures as the risk of loss is very high.

When assessing whether to trade RTY, small-cap traders may carefully offset prospects of potential Russell index returns against increased levels of volatility. However, remaining informed by economic indicators and small-cap stock research may help guide RTY trading decisions.

With the appropriate approach, USA 2000 trading may prove a worthwhile addition to traders' index CFD trading strategy, offering both short-term possibilities and longer-term growth potential, including its associated risks.

FAQs

What Does the Russell 2000 Track?

The Russell 2000 tracks the performance of small-cap stocks, complementing other major indices that focus on large-cap stocks.

How Many Companies Are in the Russell 2000 in 2024?

As of the last reconstitution in 2023, the index had a total of 1916 total Russell 2000 index components.

What Are the Largest Companies on the Russell 2000?

The five largest companies in the Russell 2000 in 2024, apart from SMCI and MSTR, are Celcius, Emcor, and Ovintiv (OVV). All span market caps well into double digits.

What Are the Russell 2000 Trading Hours?

Index, Commodities, and CFDs are traded 24 hours a day, five days a week, while share CFDs are traded based on the relevant stock exchange's trading hours.

*Instrument availability subject to regulation