At Carlson Investments, we believe the Russell 3000 index is the best domestic benchmark. Other market indexes you might be familiar with include the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite Index.
But first, what is a market index? It’s a measuring tool for a particular stock market segment. An index helps to track and show how well or poorly a group of stocks or assets are performing. Think of it as a collection of stocks or securities representing a portion of the overall market.
If you’re looking for a registered investment advisor, you may be wondering what market index each potential firm uses. Read on to learn why our wealth advisors find the Russell 3000 offers the best investment insights for our clients.
What is the Russell 3000 + Why Do We Prefer It?
The Russell 3000 is a market index that measures the performance of the top 3,000 U.S. publicly traded companies as ranked by their respective market capitalizations. This index provides investors broad exposure across approximately 98% of all U.S. stocks and the U.S. economy.
So, why do we prefer the Russell 3000? For one thing, it offers a much broader exposure of the overall stock market compared to other commonly used indexes.
For example, the S&P 500 index tracks the top 500 companies in the market, offering only 80% exposure to all U.S. equities. It also has a much heavier weighting on the top 5 stocks in the market, which in some periods make up as much as 20% of the index.
The Russell 3000 has a similar weighting but for the top 10 U.S. domestic equities, providing more diversity than the S&P 500 plus additional exposure to small and mid-sized companies. This can expose investors to up-and-coming companies that offer new products or innovations in their respective industries that would not be available in the S&P 500. You never know when the next Google or Tesla will arise!
What About the Dow Jones Industrial Average?
Another commonly referenced market index by investors is the Dow Jones Industrial Average (DJIA), which tracks 30 large publicly owned blue chip companies (i.e., large, well-established, financially sound businesses, many of which are household names).
Unlike the Russell 3000 or the S&P 500, the DJIA is price-weighted rather than market-cap-weighted. This means stocks with higher share prices are given greater weight in the index. Thus, a one-point move in any component stocks (i.e., individual companies that make up the index) will move the index by an identical number of points.
Additionally, the DJIA lacks exposure to small and mid-sized companies, causing investors to miss out on newer companies disrupting their industries with innovative technologies or business models.
Leveraging the Russell 3000 for a Diversified Portfolio
Carlson Investments views the Russell 3000 index as the best domestic benchmark over the long term because it:
- Covers a wide range of companies and approximately 98% of the U.S. market
- Provides diverse sector exposure to companies across various sectors and industries
- Undergoes annual rebalancing to include new, growing companies and remove those that no longer meet the criteria
These benefits of the Russell 3000 provide our investment advisors with big-picture insights necessary to help clients build diversified portfolios with strategic asset allocation and security selection.
Whether you’re interested in learning more about the stock market or want to hear how we can help you manage it, speak with a Carlson wealth advisor today! We’re always happy to help you expand your financial knowledge.
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