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Russell Microcap Index: What it is, How it Works

By
Adam Hayes
Full Bio

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated June 30, 2022
Reviewed by Julius Mansa

What Is the Russell Microcap Index?

The Russell Microcap Index consists of the smallest 1,000 securities in the small-cap Russell 2000 Index, plus the next 1,000 smallest eligible securities based on a combination of their market capitalization and current index membership weight.

The broad index is designed to present an unbiased collection of the smallest tradable securities that still meet exchange listing requirements, so over-the-counter (OTC) stocks and pink sheet securities are excluded.

Key Takeaways

  • The Russell Microcap index covers the smallest stocks in the Russell 2000 with market caps between approximately $50 million and $300 million.
  • The Russell Microcap Index is constructed to provide a comprehensive and unbiased barometer for the microcap segment trading on national exchanges. 
  • Microcaps tend to be riskier and more volatile than large-cap stocks, but can also produce diamonds in the rough with above-average growth potential.

Understanding the Russell Microcap Index

While the Russell 2000 is the most commonly quoted small-cap index, the Microcap Index is a valuable tool for examining trends in smaller, startup companies known as micro-caps. The Index is completely reconstituted annually to ensure new and growing equities are reflected and companies continue to reflect appropriate capitalization and value characteristics. 

The current index’s top five sector weightings are financial services, healthcare, consumer discretionary, producer durables, and technology. Healthcare (combining pharmaceuticals and biotech) names make up four of its 10 largest holdings.

The Microcap Index represents just a small fraction of the overall U.S. equity market by capitalization. As of October 2020, the index's stock with the market cap was S2.89 billion, with a median stock value of just $256 million. The top 10 index constituents as of that time were as follows:

  1. Overstock Com Inc (consumer discretionary)
  2. Digital Turbine Inc (consumer discretionary)
  3. Sorrento Therapeutics (healthcare)
  4. Workhorse Group Inc (industrials)
  5. Vivint Solar Inc (consumer discretionary)
  6. Kura Oncology Inc (healthcare)
  7. Cryoport Inc (industrials)
  8. Owens & Minor Inc (healthcare)
  9. Maxar Technologies Inc (industrials)
  10. Seres Therapeutics Inc (healthcare)

Other Russell Microcap Indices

In addition to the Microcap Index, Russell maintains a Microcap Growth (with 869 holdings) and a Microcap Value Index (1,058 holdings).

The Russell Microcap Growth Index measures the performance of the microcap growth segment of the U.S. equity market. It includes Russell Microcap companies that are considered more growth oriented relative to the overall market as defined by Russell's leading style methodology. Similarly, the Russell Microcap Value Index includes Russel Microcap companies that are considered more value-oriented.

Investing in Microcap Stocks

Microcap stocks make up less than 3% of the U.S. equity market. These smaller company stocks are challenging to invest in given significant issues with liquidity and thin trading volumes. Investors looking to gain exposure to the asset class can purchase an exchange traded fund (ETF) that replicates the Russell Microcap Index from iShares, which trades under the ticker (IWC).

But there are important differences between the benchmark index itself and the iShares’ fund. For example, IWC has roughly 1,400 holdings with its 10 largest holdings all in the healthcare sector, followed by financials, information technology, consumer discretionary, and industrials that round up the top five sector weights.

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