Tuesday, November 4, 2008

Russell Stock Indexes

We looked at how the Dow Jones Industrial Average is not a great gauge of the US stock market here. While we saw that the S&P 500 is a much better gauge of the markets, it's not a great index against which to compare our ability to select stocks, particularly for those of us who invest in small stocks. The Russell family of indexes offers us a solution.

The Russell 3000E index contains the largest 4,000 American stocks, which represents 99% of the US market...you can't get more comprehensive than that! For some reason though, this index is almost never discussed or reported by the mainstream media, yet if you want a gauge of aggregate market valuations, this is the index to use!

From this parent index, several sub-indices exist. While they are all market-cap weighted (adjusted for float) like the S&P 500, due to the number of stock constituents, they are far more useful. For example, the Russell 1000 is the largest 1000 stocks, and the Russell 2000 contains the next largest 2000 stocks (and therefore contains only small-caps). If you're an index investor but want exposure to small-caps in your investments, an investment in the Russell 2000 index will do the trick. If you're a stock picker but concentrate on small-caps, which is where many value funds focus as usually there are more inefficiencies in pricings to be found, the Russell 2000 is a great basis for results comparisons!

If you are like most investors, you think you are better than average at picking stocks. You can find an appropriate Russell index that will help you find out if you're right!

1 comment:

Patrick said...

The Russell indexes are decent for gauging the market in various ways, but not so much for investing, because they have a rigid, simplistic policy for inclusion that leads to a lot of turnaround, and importantly, a lot of predictable turnaround, putting index investors on the wrong side of trades from arbitrageurs. Russell has recently made some changes to help this situation, but you're still better off following, say, the S&P 600 rather than the Russell 2000 if you want small-cap stocks.