The Russell 3000® Index is an index of the stock prices of 3,000 publicly traded US companies. This covers around 98% of the total in the United States. The combination of the scale and the credibility of the index means it is used as a reference point by both analysts and companies offering financial products such as mutual funds.
The system of names used by Russell Investments has the potential to cause confusion. The Russell 3000® index is a subset of the Russell 3000E® index, which is the broadest index the company operates. The latter actually includes 4,000 companies; the E stands for Extended, and the index is made up of the 3,000 stocks in the Russell 3000® plus 1,000 smaller stocks.
The Russell 3000E® index covers all stocks traded in the United States, bar a few exceptions. These include those that are trading at below $1 United States Dollars (USD), some of those that trade over the counter — meaning they aren't traded on exchanges — and foreign stocks. Of all the stocks covered in the Russell 3000E®, the largest 3,000 are selected for the Russell 3000® index. This is based on market capitalization, which is the stock price multiplied by the number of tradable shares. In effect, it is the value the market places on the company as a whole.
The list of stocks included in the various Russell indices is calculated once a year. It is based on market capitalization annually as of 31 May, with the new list announced in the middle of June and taking effect on the last Friday of June. If a company merges or its stock is delisted, it is not automatically removed from the Russell 3000®. Such stocks will usually be the first candidates for removal when newly floated companies are added, which happens once a quarter.
There are two main ways in which the Russell 3000® index is used. The first is as a reference point. It can be used simply to track how well stock markets as a whole have performed, or to track the relative performance of particular industry sectors. It can also be used as a benchmark to assess the performance of a fund manager; somebody who fails to outperform the index figure is unlikely to win much business!
The other main use of the Russell 3000® index is for mutual funds and exchange-traded funds. These are designed to buy and sell stocks in proportions that match the index's constitution. In turn, this should mean the funds match the performance of the market as a whole.