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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Russell 1000 Index

What it is:

The Russell 1000 Index is designed to track the performance of most major large-cap companies. Though it is not usually cited by individual investors, it is the third most widely used benchmark by money managers (behind the S&P 500 and the Russell 2000). While most individual investors will look at the S&P 500 as a gauge for the overall market, the Russell 1000 is useful for those who want to track an even broader market segment.

How it works (Example):

As the name implies, the Russell 1000 contains 1000 component stocks. The index is a subset of the much larger Russell 3000 Index--it simply contains the 1000 largest stocks within that index. The components of the Russell 1000 Index account for about 90% of the equity traded on the U.S. exchanges. The index is market cap weighted, meaning that the largest firms have the greatest impact on the returns of this index. Russell 1000 components range in size from $1 billion to more than $300 billion (based on market cap), with average firm carrying a market cap of around $80 billion. The index is highly diversified, as its component stocks are involved in just about every sector imaginable. Even though the top 10 holdings represent 20% of the Russell's value, this is still not as high as other comparable indices.

Why it Matters:

The Russell 1000 Index contains a deeper range of stocks than the more widely cited Dow Jones Industrial Average or the S&P 500. For many fund managers, this index represents the universe of large, liquid stocks that are suitable for investment. Because of this, the Russell 1000 is a good benchmark for many managers.

Several mutual funds and ETFs track the performance of the Russell 1000 Index. Our favorite way to trade the index is through an investment in the iShares Russell 1000 Fund (NYSE: IWB). Thanks to its status as an ETF, investors can buy or sell this fund throughout the trading day just like a common stock. It also carries a very low 0.15% expense ratio.

There are however drawbacks to this index. Since the largest components in the index are so heavily weighted, most individual investors will see little gain from investing or tracking this index instead of the S&P 500. After all, thanks to the heavy weighting of large stocks, the returns posted by both indices tend to be very similar. It's also worth noting that the Russell 3000 usually outperforms the 1000 by a small margin, due in large part to the inclusion of smaller, higher-growth firms.