What Is the Russell 2000? And Why Is It Important?

In a new video series from The Motley Fool, we're tackling basic questions in the hopes of demystifying the investing world. In today's video (run time: 2:58), I break down the Russell 2000 index (RUSSELLINDICES: ^RUT), a widely followed benchmark of small-cap stocks that can be owned via the popular iShares Russell 2000 (ASE: IWM) exchange-traded fund.

Unlike blue chip indexes such as the Dow Jones Industrial Average or S&P 500, the Russell 2000 isn't quoted every night on the news. But this index, which tracks the 2,000 smallest companies of the whole-market-tracking Russell 3000 index, is an important barometer of the American economy because it measures the performance of smaller, domestically focused businesses. The median market cap of a Russell 2000 component is less than $500 million, and unlike your typical Dow component, these firms aren't doing business in dozens of countries.

There's more. According to data from Ibbotson Associates, over the long term, small-cap stocks have outperformed large-cap stocks by about 2 percentage points per year, which adds up to a substantial difference over the years. For more on what the Russell 2000 is and why it's important, watch the video now:

New to investing? Click here for The Motley Fool's special research report detailing the savings habits you need to build long-term wealth, along with three stock ideas to help build a retirement-readyportfolio.

At the time thisarticle was published Fool.com managing editor Brian Richards holds no position in any company or ETF mentioned. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.