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How to invest in Russell 2000 index funds in 2023
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9/1082% of retail CFD accounts lose money.
It only takes a few minutes to invest in the Russell 2000 index. One of the simplest and most popular ways to invest is to buy shares in a Vanguard Russell 2000 ETF through an online trading platform.
Where can I invest in the Russell 2000 index?
Copy link to sectionAccording to our expert research, eToro is the best ETF broker to invest in Russell 2000 index funds.
Both Russell 2000 ETFs and Russell 2000 CFDs are available to invest in through eToro .
Here are three more places to buy the Russell 2000, ranked according to their cost, security, and features.
77% of retail CFD accounts lose money.
How do I invest in the RUT index?
Copy link to sectionThe easiest way is to sign up to a stock broker, open an investment account, and buy shares in an Russell 2000 ETF or CFD. This guide explains how to do it:
Step 1. Sign up to eToro
Copy link to sectionWe recommend using eToro to invest in Russell 2000. Sign up for a brokerage account and deposit some money. You may need to supply a form of photo ID to verify the account.
77% of retail CFD accounts lose money.
Step 2. Decide how to buy Russell 2000
Copy link to sectionThis boils down to choosing between an Russell 2000 ETF or CFD. ETFs are generally better suited to investors who want to passively track the Russell 2000’s performance. CFDs offer a greater range of trading options: you can use leverage, short the index, or buy and sell it outside of trading hours.
Step 3. Invest in the Russell 2000
Copy link to sectionSign into your trading account and search for the Russell 2000. Hit the ‘buy’ button and enter the details of your purchase, such as how much you want to spend. Hit ‘buy’ again to execute the trade.
Step 4. Monitor your investment
Copy link to sectionWhen you buy a CFD, the trade goes through more or less instantly, and you’ll be able to see your new open position in your trading account. ETF purchases can take longer, and if you buy outside of traditional trading hours it won’t go through until the next morning.
Your trading account will show the price change in the Russell 2000 since you bought it, so you can see your profit/loss at a glance. Use that information, along with your own research, to decide when to sell the Russell 2000 and close your position, ideally at a profit!
The different ways to invest in the RUT
Copy link to sectionAs we mentioned above, there are numerous ways to put your money into the Russell 2000. ETFs and CFDs are the simplest options for beginners, but there are alternatives. Here’s a brief overview of each option and who it’s best suited for.
Russell 2000 ETFs
Copy link to sectionAn ETF (exchange-traded fund) is an investment fund traded on a stock exchange, much like a stock. Exchange traded funds can hold different assets, such as individual stocks, bonds, or commodities, or serve as a proxy for a stock market index.
An Russell 2000 ETF is one way of investing in the Russell 2000. It’s simply an investment fund that mirrors the performance of the Russell 2000. When you buy shares in the fund, the value of your investment will rise or fall with the Russell 2000 itself.
ETFs are ideal for new investors because they have a very low minimum investment. You can start with a few pounds and get exposure to some of the world’s largest companies. They’re also practical if you plan on trading the Russell 2000 index, because you can buy or sell shares in the fund throughout the day.
Examples of popular RUT ETFs
- iShares Russell 2000 ETF (IWM)
- Vanguard Russell 2000 ETF (VTWO)
- SPDR Russell 2000 ETF (TWOK)
Russell 2000 index funds
Copy link to sectionAn index or mutual fund is an investment fund that aims to track the performance of a stock market index, such as the Russell 2000. It’s very similar to an ETF, in that there are low management fees and you can buy shares through your online broker.
However, there are a couple of differences. Russell 2000 index funds are only priced at the end of each trading day, so you can buy or sell shares in the fund once per day. There may also be a higher barrier to entry, through a much larger minimum investment when you invest in Russell 2000 index funds.
That means an Russell 2000 mutual fund is better suited for long term investors with a higher initial budget, where the infrequent trading and barriers to entry are far less of an issue.
Examples of popular RUT index funds/mutual funds
- T. Rowe Price Small-Cap Stock Fund (OTCFX)
- American Century Small Cap Value Fund (ASVIX)
- Fidelity Small Cap Discovery Fund (FSCRX)
Russell 2000 CFDs
Copy link to sectionCFDs (contracts for difference) are a way to speculate on Russell 2000 price changes with more flexibility than if you use an ETF or index fund. A CFD is a ‘derivative’, which means it gets its value from the underlying asset – in this case the Russell 2000 – but it’s separate from it.
As a result, CFDs can be leveraged, where you borrow money to multiply the size of the trade, or they can be used to go ‘short’, where you place a trade on the index to fall in value. You can also buy and sell them outside of regular trading hours.
All of this means Russell 2000 CFDs offer the potential to outperform a fund that passively tracks the Russell 2000’s performance. Of course, you can also underperform it as well. Tools like leverage and shorting introduce a lot more risk, and are best left to experienced traders.
Russell 2000 futures
Copy link to sectionFutures contracts are agreements to buy or sell the RUT at an agreed price on a set date in the future. Russell 2000 futures are a means to predict how you think the index is going to perform over a set time frame, such as the next three or six months.
Most futures contracts involve leverage, so you only put up a small part of the total trade value (the margin) when you buy one. That makes futures more risky, and they require a bit more financial expertise to understand as well.
Some traders use futures as a hedge against the performance of stocks they own. For instance, if you own stocks that are part of the Russell 2000 then you might want to short the Russell 2000 so that you still make some money if the price falls.
Russell 2000 stocks
Copy link to sectionAnother way to invest in the Russell 2000 is to buy shares in the individual stocks that the index tracks. It isn’t practical to buy every share in the index, but you can invest directly into a few of the most heavily weighted stocks in the Russell 2000 in order to get broad exposure to its performance.
The most heavily weighted stocks in the Russell 2000 tend to be the largest companies by market capitalisation. If you invest directly in those largest stocks, you gain exposure to the index without taking on the risk of all the underlying companies.
One reason to do this is that these larger companies with the highest market cap dominate the index anyway, so that it can give you the impression of a diversified portfolio while actually being reliant on the performance of those particular stocks.
For the Russell 2000 index, the largest stocks you might choose to invest in are:
| Company | Index weight |
|---|---|
| Novavax Inc (NVAX) | 0.28% |
| Nucor Corporation (NUE) | 0.27% |
| Penumbra Inc (PEN) | 0.25% |
| Insulet Corporation (PODD) | 0.24% |
| Wintrust Financial Corporation (WTFC) | 0.23% |
| Group 1 Automotive Inc (GPI) | 0.22% |
| Bio-Rad Laboratories Inc (BIO) | 0.22% |
| Teradyne Inc (TER) | 0.22% |
| Trex Company Inc (TREX) | 0.22% |
| Enphase Energy Inc (ENPH) | 0.22% |
The flip side of investing directly like this is that you lose the diversification and stability that comes with buying into an entire index. It requires much more hands-on management to do your own stock picking, so it’s best suited to more experienced investors.
How much does it cost to invest in the Russell 2000 index?
Copy link to sectionFrom $0 to $5, depending on how you invest. For each option, you must consider the cost of buying the actual asset, whether that’s an ETF, index fund, CFD, or share, plus the fees associated with it.
| Instrument | Trading fee | Management fee |
|---|---|---|
| Exchange traded funds | $0-$5.99 | 0-0.2% |
| Index fund / mutual fund | $0-$5.99 | 0.1-2% |
| Individual stock | $0-$3 | None |
| CFD | $0 | None |
*A fee comparison of 3 leading brokers for example purposes
ETFs and CFDs are generally the cheapest option overall, as they have low fees and a low minimum investment. Index funds and mutual funds have low fees but may have a high minimum investment. Buying individual stocks is the most expensive option in absolute terms, because the share price of a single large company is often more than $100.
All options are likely to include a trading fee, which you pay each time you make a transaction. Some trading platforms offer zero-fee trading, with others it may be a few dollars.
Then ETFs and index funds each have their own expense ratio. Expense ratios refer to an annual management fee, charged as a percentage of your total investment. Expense ratios are usually no more than 0.05%, so if you invest $1,000, you would pay $5 per year in management fees.
Should I invest in the Russell 2000 index?
Copy link to sectionYes, Russell 2000 investing is a great choice if you’re looking for a safer investment with more price stability compared to picking individual stocks. It gives you an instantly diverse portfolio with exposure to a broad area of the stock market.
The flip side is that you have less control over which companies you invest in. An index committee decides how the index works, and you can’t pick and choose the underlying companies you like the most. The Russell 2000 is better suited to hands-off investors, compared to those who have the skills, experience, and desire to pick their own stocks.
What are the advantages of investing in the Russell 2000 index?
Copy link to sectionAn index provides instant stock market diversification, where you spread your risk across a large number of underlying companies, rather than one or two. Here are some more reasons why you might want to invest in the Russell 2000 index:
- It gives exposure to small-cap stocks. 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.
- Potential for high returns. 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.
- It is diverse. The index is well diversified across various sectors, which can help reduce overall portfolio risk. It is also equally weighted, where no single company can really control its performance.
- It is a good indicator of the overall US economy. The Russell 2000 Index represents a broad cross-section of the US economy, providing a way for investors to participate in the growth of the US economy as a whole.
What are the disadvantages of investing in the Russell 2000 index?
Copy link to sectionThe main risk of investing in the Russell 2000 is that all the underlying companies are related in some way, so a broader economic downturn that affected the entire country would likely affect many stocks in the index at the same time. Here are some more risks of Russell 2000 investing.
- Volatility is higher. With small-cap stocks comes volatility. As the index includes a large number of smaller companies, prices can change very quickly, making it a volatile index.
- It’s less liquid compared to other indexes. Some of the smaller companies in the index may have lower trading volume and liquidity, making it more difficult to buy and sell shares quickly and at a desirable price.
- There is a risk of concentration to just a few sectors. The index is heavily weighted toward the financials and healthcare sectors, which comprise a large portion. This could lead to concentration risk if these sectors experience downturns.
FAQs
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