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

Russell 3000 Index

What it is:

Started in 1984, the Russell 3000 Index attempts to capture the return of the overall market.

The index can be subdivided into two segments: the Russell 1000 (consisting of the 1000 largest market-cap companies) and Russell 2000 (consisting of 2000 small-cap companies).

Because of its broad diversification and large number of holdings, this index often makes for a popular alternative to the Wilshire 5000 total market index.

How it works (Example):

The Russell 3000 Index is comprised of the 3,000 largest and most liquid stocks based and traded in the U.S.

The U.S.-based requirement disqualifies many large international firms from inclusion into the index--names such as Unilever, Schlumberger and Seagrams, just to name a few. The components of the Russell 3000 Index account for roughly 98% of the total value of all equity traded on U.S. exchanges, making this a very broad index indeed. The index is market-cap weighted, so the largest firms have the biggest impact on the index's value.

Why it Matters:

This index captures virtually the entire return posted by U.S.-based stocks. The more stringent requirements for inclusion also probably make it a better representation of the universe of actively traded stocks when compared to the Wilshire 5000.

Most investors consider the Wilshire 5000 to be the benchmark for total market returns. Even if it includes stocks that are almost impossible to trade, that index contains more equities and thus gets more focus. Although the Russell 3000 gets little attention, its two subsets, the 1000 and 2000, are widely followed.

After noticing that large indices consistently lag behind smaller, more focused ones, many investors are beginning to wonder if there is such a thing as "too much" diversification. Is it only a matter of time before someone launches a "world index" that contains all equities traded in every country and renders other total market indices obsolete?

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