How to invest in the Russell 2000 from Canada

• Find out what the Russell 2000 index is all about for investors.
• Easiest ways to invest in the Russell 2000.
• Pros and cons of investing in the Russell 2000.

The Russell 2000 is one of around 5,000 US stock market indexes used by investors and economists to get a feel for the state of US stock markets and the US economy in general. Stock market indexes are composite measurements of movements in the price of the stocks included in the index.

As its name suggests, the Russell 2000 index tracks the price movements of 2,000 US shares, in this case in companies with a relatively small capitalization. The Russell 2000 is, in fact, the lowest two-thirds of another index, the Russell 3000 (an index of 3,000 listed companies that represent about 97% of the US stock market).

The Russell 2000 is the main benchmark for listed companies with small to midsize capitalization. The index was started in 1984 and is maintained by FTSE Russell, a subsidiary of the London Stock Exchange.

There are several ways to invest in the Russell 2000 from Canada: shares, ETFs, and index funds. This guide has everything you need to get started.

You can’t invest directly in the Russell 2000 by buying a share of it. Instead, you can invest in exchange traded funds (ETFs) or index funds that track the Russell 2000 or buy shares in individual companies which form the index.

Exchange traded funds

ETFs are investments that pool cash created by selling units in the fund, and investing the cash in a basket of securities – such as shares, fixed interest bonds, and commodities. Each ETF aims to track a particular market index, industry, commodity, or investment strategy.

ETF units can be bought and sold on the stock market like a company share. Their unit prices fluctuate during the trading day. However, they generally experience less volatility than individual company share prices because they are not dependent on the performance of a single company. This makes them a way to diversify and spread risk, which is particularly relevant when investing in small companies such as those that constitute the Russell 2000 index.

Since they are less risky than individual shares, an investment in ETFs is less likely to record significant losses or gains in the short term.

Investing in ETFs is a strategy for long-term investors. However, be aware that the Russell 2000, because its component companies are smaller and more volatile, can experience much larger swings than large-cap indexes like the S&P 500.

Some small-cap ETFs exactly track the Russell 2000 (see ‘Index funds’ below), while others may be actively managed, with a team of market experts choosing which stocks to invest in.

Here are some examples of actively managed ETFs that are likely to invest heavily in Russell 2000 companies without exactly following the index:

• Vanguard Small Cap Value ETF (NYSEARCA: VBR)
• Schwab US Small-Cap ETF (NYSEARCA: SCHA)
• Avantis US Small Cap Value ETF (NYSEARCA: AVUV)

Index funds

An index fund is a type of ETF which aims to mirror exactly the performance of a market index by investing in all the shares in the index, in the same proportion as the index. In the case of the Russell 2000, the index is weighted by market capitalization, which means that companies with higher market capitalization will have a greater influence on the movement of the index.

Because they automatically track an index, index fund ETFs are passive funds, unlike actively managed ETFs, which may not follow any index exactly. Passive funds will usually have lower management fees than actively managed ETFs.

Canadian investors can choose to invest in Russell 2000 index funds listed on either the New York Stock Exchange (NYSE), NASDAQ, or the TSX. Some well-known funds, all of which trade in USD, include:

• iShares Russell 2000 ETF (NYSEARCA: IWM)
• Vanguard Russell 2000 Index Fund (NASDAQ: VTWO)
• ProShares UltraPro Russell 2000 (NYSEARCA: URTY)

Individual company shares

Another way to invest in the Russell 2000 is to select several of the companies listed on the exchange and invest in them directly.

It would be much too time-consuming and expensive to attempt to invest in all of them. Among the most notable are Ovintiv Inc (NYSE: OVV), Antero Resources Group (NYSE: AR), Chesapeake Energy Corp (NASDAQ: CHK), and Avis Budget Group (NASDAQ: CAR).

There’s an increased risk in investing in individual shares because the success of your investments depends on the fortunes of one or just a few companies rather than a diversified fund.

Step 1: Choose a broker

There is no shortage of online stock trading platforms to choose from. When comparing options, check their brokerage, cash withdrawal, and activity fee amounts. Available tradable securities offered should include ETFs and shares.

If you wish to invest in stocks and ETFs via the New York Stock Exchange or NASDAQ, whichever broker you choose must have access to that exchange. You may also find it beneficial for your broker to provide access to international markets.

Step 2: Decide how much to invest

Only ever invest what you can afford to lose because stock markets are volatile.

Given their smaller size, the valuation of Russell 2000 companies can be volatile. If you can’t withstand losses in the short term, it’s best to wait until you can or plan to invest for the long term only. Losses are always a possibility, and your capital will be at risk.

Step 3: Transfer funds to your account

Add funds to your trading account with a bank transfer, the most commonly accepted method. Some brokers also accept deposits made with a credit card.

It may take some time for funds to clear before you can start trading, and if you are trading in USD but funded your account with CAD, your cash will have to be converted into the required currency first. This will typically incur a currency conversion fee (which is one of the ways brokers make money).

Note that your broker may require a minimum deposit amount.

Step 4: Choose between stocks, ETFs, and index funds (or a combination of them)

ETFs and index funds are diversified across a range of companies, so they typically experience lower price volatility than individual company shares and can be better for long-term investment.

• Short-term investors hoping for quick capital gains (but also prepared for losses) may prefer to buy stocks.
• ETFs can often be traded commission-free.
• Index funds mirror the market, so their value rises and falls in line with the broader market.

Step 5: Configure your order

Depending on the broker you use, you can choose from many different kinds of order.

A market price order is the most straightforward since they require practically no configuration. Once a market order has been executed, you’ll get shares at the next available market price for the share or fund unit.

You'll need more flexibility when configuring orders if you want to execute a specific trading strategy. Some brokers have highly customizable orders that can be triggered by events, meaning you can buy or sell when your chosen stock or fund hits a price target.

Step 6: Place your order

When you’re happy with all of your decisions, submit your order to be executed.

Step 7: Monitor your investment

Share investment should not be a set-and-forget activity. Even if you intend to invest for the long term, you need to keep an eye on the company or fund's performance and price movements.