In a nutshell, the Russell 3000 is a market index that tracks the performance of the 3,000 largest publicly traded U.S. companies. Whereas the Russell 2000 is a market index that tracks the performance of the 2,000 smallest publicly traded U.S. companies WITHIN the Russell 3000.
With that being said, let’s dive into a more detailed analysis of the key differences between the Russell 2000 vs Russell 3000. Note: Our analysis leverages data from 2 Vanguard Exchange-Traded Funds (ETFs) that mimic the Russell 2000 (VTWO) and Russell 3000 (VTHR).
Russell 2000 vs Russell 3000: Differences in Sector Composition
The first major difference between the Russell 2000 and the Russell 3000 is the % sector composition making up each index:
The % difference in sector compositions become more apparent when looking at the below data visualization:
From a sector composition perspective, here is what stood out to me:
- Investments in the Technology, Financials & Real Estate Sectors accounted for 23.5% of the total variability between the Russell 2000 and Russell 3000
- Investments in the Health Care, Consumer Discretionary & Utilities Sectors are relatively similar between the Russell 2000 and Russell 3000 – accounting for only 1.9% of the total variability
Russell 2000 vs Russell 3000 vs S&P 500: Differences in Returns
While variation in sector composition is interesting, how does that impact the total returns for each index?
Sector composition has a HUGE impact. This is what specifically stood out to me:
From 2011-2021:
- The Russell 3000 outperformed the Russell 2000 by 31.73%
- The S&P 500 only outperformed the Russell 3000 by 1.47%
- The S&P 500 outperformed the Russell 2000 by 33.20%
- The S&P 500 outperformed the Russell 3000 91% of the time
- The Russell 3000 outperformed the Russell 2000 73% of the time
- The only year the Russell 3000 outperformed the S&P 500 was in 2019 by 0.12%
- The largest % return difference in a given year between the Russell 2000 vs Russell 3000 was 10.86% in 2021
Using the above total returns, let’s do a backtest to see how a theoretical $10,000 investment in each index would have performed:
And here is the same data summarized in a table:
Honestly, I was surprised to see almost identical performance between the S&P 500 and the Russell 3000. The fact there was only a $595.97 difference between the final investment balances after a 10 year time period is incredible.
Furthermore, it was interesting to see how much the Russell 2000 underperformed relative to the other market indices. The subtraction of the 1000 largest companies from the Russell 3000 to create the Russell 2000 had a substantial impact on total performance.
Frequently Asked Questions
Does the Russell 2000 outperform the S&P 500?
From 2011-2021, the S&P 500 has outperformed the Russell 2000 by 33.20%.
What is the difference between the S&P 500 and the Russell 3000?
The S&P 500 tracks the 500 largest publicly traded U.S. companies while the Russell 3000 tracks the performance of the 3,000 largest publicly traded U.S. companies. According to Forbes, the Russell 3000 tracks ~98% of all U.S. stocks while the S&P 500 only offers exposure to ~80% of all U.S. stocks.
What is the difference between Russell 2000 vs S&P 500?
The Russell 2000 tracks the 2000 smallest publicly traded U.S. companies within the Russell 3000 while the S&P 500 tracks the 500 largest publicly traded U.S. companies.
Final Thoughts
While the Russell 3000 and the Russell 2000 have a correlation in performance, they do differ in several key ways. This includes but is not limited to:
- The number of companies tracked
- The size of companies tracked
- The level of exposure to different sectors
At the end of the day, making the decision to invest in an ETF/Mutual Fund tracking either market index boils down to one’s personal preference on exposure to small-cap vs large-cap U.S. stocks.
Thank you for reading! 🙂
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