How to invest in the Russell 2000 Index
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The Russell 2000 Index could be the perfect investment opportunity for you. There are lots of ways to invest in the index, so we’re here to help. This page takes you through everything you need to know to make an informed decision about how to invest your money.
Where can I buy into the Russell 2000 Index?
What is the Russell 2000 Index?
It is a stock market index consisting of the smallest 2,000 stocks within the Russell 3000 index. It consists of what’s called small-cap stocks, which refer to stocks with market capitalisations of $300 million to $2 billion. The index is the most popular benchmark index in the world for mutual fund managers who want to invest in small-cap stocks.
Is it a good investment?
That depends on your investment strategy, but it can definitely be a good investment in some situations. Small-cap stocks have historically outperformed large-cap stocks, and therefore offer a great opportunity to realise large gains. This makes sense when you think about it since smaller-cap stocks tend to be companies at the beginning of their growth cycle, whereas large-cap stocks tend to be more mature companies whose growth has levelled out over time. That doesn’t make the the index immune from risk though, and what you gain from the increased chances of one of the stocks growing rapidly is offset by the risk that some could fall quickly instead.
How do I invest in the Russell 2000 Index?
To invest in the index, it’s a good idea to follow these three important steps:
- Choose an investment type
- Use our top tips to succeed
- Choose a platform to invest with
1. Choose investment type
Different investment types bring different advantages. You might choose one investment type based on low transaction fees or another based on the quality of the customer service and investment advice that’s offered. Here’s a look at the methods you can use to invest in the index:
An ETF (exchange-traded fund) is an investment fund that can be traded on a stock exchange. You can buy an ETF during regular stock market hours, something you can’t do with some other forms of diversified investment products. ETFs include collections of assets such as bonds or commodities, or in this case a collection of stocks such as the stocks found in the Russell 2000 Index. By being invested in 2,000 stocks at once, an ETF lets you benefit from diversification, without the high fees that come with some other investment types.
If you’re looking for a more customisable approach, you can try buying the stocks that are tracked by the index in individual trades. To do that, though, you need to buy a large number of stocks one at a time, then pare down your holdings until you have a smaller batch of elite holdings. As the index tracks 2,000 stocks, though, this approach is generally not advised as it would take a lot of time and incur high trading fees. Investing in this way is generally better suited to indices that track a smaller number of stocks, such as the Dow Jones Industrial Average.
A mutual fund is an investment fund that’s run by a professional money manager, pooling investors’ money and then trying to deliver maximum returns. You can buy mutual funds through a broker or directly from the company that administers the fund. A mutual fund (also called an index fund in this instance) allows you to invest in all of the Russell 2000 Index’s stocks at once.
One problem with mutual funds is that you can only buy them at the end of the stock market’s trading day, not during regular market trading hours as you can with an ETF. Mutual funds also charge higher fees than ETFs do, so they are generally better suited to investors who want to buy and hold for a long time, rather than trade their investment on an exchange.
2. Use our top tips to be a successful investor
Before you invest, check out our top investment tips. Keeping these in mind will help give you the best chance of investment success.
- Do your research. Study the index’s recent performance and historical performance, and then analyse how investing in it compares to other investments. This will help you figure out your goals, including the types of gains you’re hoping to land, as well as the size of the losses you’re emotionally and financially prepared to handle. The more research you do, the better positioned you will be to make the right decisions.
- Set a budget. Consider your risk tolerance and the amount of money you can afford to lose. One way to manage risk is to set a stop-loss order after you make your investment, so that you can limit the size of your potential loss. If you let your losses escalate, you could damage your confidence and your ability to afford future trades.
- Select the right platform. Pick an investing platform based on your investment goals. If all you care about is getting the lowest transaction fees, that’s very different than demanding personally-tailored investment advice.
- Grow your investments gradually. If you’re just starting off as an investor, consider starting slowly by investing a small amount of money in your trades at first. You can always get more aggressive with your investment approach later on.
- Think long-term. If you’re trying to land the biggest possible gains from the index, a buy-and-hold approach could be a good idea. If you’re going to try to buy and hold, make sure you analyse market conditions and you invest at a time when the market is looking bullish, as bear markets cause steep falls in the value of indices.
3. Choose a platform to invest with
The platform you use to invest in the index should depend on your particular investment priorities. The most popular venues for this type of investment are listed below:
- Brokers & trading platforms. Online brokers offer easy-to-use tools that make investing simple and inexpensive. The drawback is that most online brokers don’t provide in-depth investment advice. If you’re looking for higher-level investment guidance, there are better options available to you.
- Robo advisors. Robo advisors execute trades through the use of algorithms, keeping transaction costs relatively low. Though the trading is automated, some robo advisors will still allow you to discuss your investment strategy with a human being, providing yet another advantage. That said, robo advisors don’t usually offer the same level of investment guidance that a top financial advisor does.
- Financial advisors. Financial advisors specialise in providing hands-on service and in-depth investment advice. They’ll review your financial goals, explain various investment options, and help you stay on track well after you’ve made your first trade. All of that customer service comes at a higher cost, though. This extra cost can sometimes be worth it, but seeing as investing in an index is a straightforward process nowadays, it’s probably not worth the added expense in this case.
- Banks. Investing in the index with your bank gives you the convenience of keeping all of your financial ventures with one institution. The problem is banks tend to charge high fees, without providing the level of service that dedicated financial advisors offer. Those negatives will outweigh the convenience factor for a number of investors.
Ready? Here’s our top recommended broker
What should I do now?
If you’re ready to go, then simply log into your chosen platform’s website, decide the specific type of investment you want to make, then click buy. Once you’ve bought into the index, continue to monitor your investment, so you can make informed decisions about whether to hold or sell your investment depending on market conditions.
Try some of our investment courses for beginners
If you’re not feeling ready to invest yet, that’s ok too! Sharpen your investing skills by reading the investing courses and news updates that we offer right here on this site.
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