For investors looking for pooled investment, exchange-traded funds (ETFs) track or outperform a particular index, sector, or commodity.Two index ETF choices include and the Russell 2000.
Russell 2000 ETFs may look more attractive than S&P 500 ETFs at the start of a bull market and may outperform their S&P 500 index counterparts during an uptrend, but with volatility or fluctuations in those returns. Investors should consider their risk tolerance, overall investment strategy, and financial goals when owning a small-cap ETF as opposed to a large-cap ETF.
Key Takeaways
- The S&P 500 and the Russell 2000 are two popular indexes.
- Many investors consider the S&P 500 the pulse of the U.S. equity market.
- Russell 2000 ETFs closely track the Russell 2000 Index, which combines 2000 small-cap companies in the Russell universe of 3000 stocks.
S&P 500 ETFs
The Standard & Poor's 500 (S&P 500) is a market-capitalization, weighted index of some of the largest publicly traded U.S. corporations. Market capitalization is determined by multiplying the number of outstanding shares of stock by the current stock price. Many analysts see the S&P 500 as an indicator of the U.S. equity market, and the index is commonly a benchmark for portfolio managers, mutual funds, and exchange-traded funds.
The index is calculated using the market capitalizations of the 500+ largest U.S. companies with stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Index constituents are selected by a committee, which evaluates criteria such as market capitalization, liquidity, financial viability, length of trading, and other factors.
As of Feb. 9, 2024, the three-year and five-year returns for the S&P 500 index were 10.2% and 14.96%, respectively. Three commonly traded ETFs that track the performance of the S&P 500 index include State Street's SPDR S&P 500 ETF Trust (SPY), BlackRock's iShares Core S&P 500 ETF (IVV), and Vanguard's S&P 500 ETF (VOO), compared in the table below:
| Expense Ratio | Net Assets | 3-Year Performance | 5-Year Performance | |
| SPDR S&P 500 ETF Trust (SPY) | 0.0945% | $483.6 B | 10.8% | 14.1% |
| iShares Core S&P 500 ETF (IVV) | 0.03% | $433.3 B | 10.96% | 14.3% |
| Vanguard's S&P 500 ETF (VOO) | 0.03% | $1.01 T | 10.97% | 14.2% |
SPY is structurally different from IVV and VOO in that it is set up as a unit investment trust (UIT) with restrictions on lending the underlying shares to other firms. Any dividends from SPY constituents for the period are collected and held in cash until quarterly distribution. Also called the Trust, SPY does not provide a dividend reinvestment service but allows them through a broker-dealer. VOO also has a quarterly distribution, while IVV issues dividends quarterly. Like SPY, neither offers dividend reinvestment services, but both allow broker-dealers to handle the transactions.
The total market value of the investments managed by a person or entity on behalf of investors is called Assets Under Management (AUM).
Russell 2000 ETFs
While the S&P 500 index typically contains large established companies, the Russell 2000 Index follows the performance of around 2,000 U.S. small-cap companies. Russell 2000 ETFs closely track the Russell 2000 Index, which combines 2,000 small-cap companies in the Russell universe of 3,000 stocks.
The Russell 3000 tracks nearly 97% of all publicly traded U.S. stocks.Both the S&P 500 and Russell 2000 indexes are market-cap-weighted. The securities in the Russell 2000 index are not selected by a committee. Instead, the holdings are determined through a formula based on their market cap and index membership.
As of Feb. 9, 2024, the Russell 2000's three-year performance was -3.45% and 7.06% for the past five years. Three notable ETFs tracking the Russell 2000 index include BlackRock's iShares Russell 2000 ETF (IWM), Vanguard's Russell 2000 ETF (VTWO), and Direxion Daily Small Cap Bull 3x Shares (TNA).
| Expense Ratio | Net Assets | 3-Year Performance | 5-Year Performance | |
| BlackRock’s iShares Russell 2000 ETF (IWM) | 0.19% | $59.6 B | -0.86% | 6.70% |
| Vanguard’s Russell 2000 ETF (VTWO) | 0.10% | $8.4 B | -0.73% | 6.86% |
| Direxion Daily Small Cap Bull 3x Shares (TNA) | 1.09% | $2.1 B | -22.68% | -9.31% |
The Direxion Daily Small Cap Bull 3x Shares (TNA) is a leveraged fund that can provide investors with enhancedleverage. The fund is designed to achieve a daily investment performance—before expenses—of 300% of the daily performance of the Russell 2000. There is no guarantee that the fund will achieve that performance, and just as leverage can magnify gains, it can also magnify losses during volatile markets.
Compared to the S&P 500 ETFs, funds tracking the Russell 2000 index tend to command higher fees since they may have more active portfolio management, meaning they're periodically balancing a larger number of securities versus the S&P ETFs.
How Is the Expense Ratio of an ETF Determined?
An expense ratio represents the percentage of expenses associated with managing the fund as a percentage of the total assets under management (AUM).
Why Is the Liquidity of an ETF?
Investors look to the daily trading volume of an ETF to determine liquidity. Liquidity represents the amount or volume of shares being exchanged. Higher liquidity is ideal since it means investors can easily buy and sell shares of the fund.
How Can Investors Compare the Performance of an ETF to an Index?
The performance of an ETF is often compared to the index it follows by looking at the net asset value (NAV) returns of each.
The Bottom Line
ETFs can be an attractive investment for those content with matching the return in a broader market. Investors have many ETFs to choose from based on the size, geographical location, or sector affiliation of companies in the index. Two popular choicesare the S&P 500 ETFs and Russell 2000 ETFs. The companies they track, large-cap for theS&P 500and small-cap for the Russell 2000, will determine the volatility of the underlying index, the constituent selection, and the fees charged.
Article Sources
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