Understanding the Russell 2000 ETF

The Russell 2000 ETF, or exchange traded fund, is based on the performance of the underlying Russell 2000 stock index. The Russell 2000 is one of the broadest based market indicators (aside from the Wilshire Composite 5000). The ETF provides a history of moving in the direction that the underlying stock behaves in the market.

The Philosophy

The philosophy behind an exchange traded fund, or ETF, is to provide an investor with a way to mirror the returns that are provided in a market index. These indexes can be based on a number of different types of assets including stocks and bonds, and as such the Russell 200 ETF. The benefit of owning an exchange traded fund is that you do not have to go out and purchase 100 shares of each of the companies that make up the index. You can instead simulate the return of the companies in the index and reduce the level of capital necessary for the participation.

In the end, it costs less money to purchase an ETF than it does to purchase the individual stocks. Also, the ETF has a broad range of stocks, and is not as restrictive as stocks.

The Risks

ETF investing, like all forms of investing, involves risks. Although you do not purchase the shares of the company in the Russell 2000 individually, you can be subject to loss of some or all of your investment. An ETF provides somewhat of a buffer between you and all of the risks that you are exposed to when investing but not a complete shield or buffer from loss. You should carefully read all of the information associated with an ETF before making the decision to invest.

The Russell 2000 Stock Index

The Russell 2000 stock index is one of the more popularly referenced indicators of the market and market success or failure. It was developed by the Frank Russell Company of Tacoma, Washington. The company is part of the Northwestern Mutual Life Insurance Company family. The index is preferred by some analysts over the more popular S&P 500 index. The S&P index is put out by the Standard & Poor Company. The Russell 2000 ETF is directly linked to the Russell Stock Index.

How ETFs Perform Based on Their Underlying Index 

Since the ETF looks to mirror the performance of the underlying security that it is tracking through passive management, the risk exposure for the investor is minimal. That is, the investor receives the return that the index performs less charges, fees and commissions.

This passive approach allows the investor who purchases the Russell 2000 ETF to come as close as buying shares in each of the index's company without the added expense or personal risk of doing so. Also the capital outlay for investing in the Russell 2000 stock index is far less than what it would be for buying each of the positions on an individual basis. 

blog comments powered by Disqus