IWM (Russell 2000) Trading Strategy — What Is It?

Last Updated on July 31, 2022 by Oddmund Groette

The Russell 2000 stock market index may not be getting as many headlines as the S&P 500 or Dow Jones, but it is surely the benchmark index for small-cap U.S. stocks. IWM provides a way to invest in the index.

IWM is the ticker symbol for iShares Russell 2000 ETF, which is one of the main ETFs that track the Russell 2000 index. The ETF provides a way to invest in the index and gain exposure to small-cap U.S. stocks.

Let’s take a look at the index.

What is the Russell 2000 index?

Russell 2000 Index is a stock market index that measures the performance of the 2,000 smallest companies included in the Russell 3000 index. It represents approximately 10% of the total Russell 3000 market capitalization. Thus, the Russell 2000 index tracks the smallest-cap stocks listed on U.S. stock exchanges.

The Russell 2000 Index was launched in 1984 by the Frank Russell Company. It is managed by FTSE Russell, which is a subsidiary of the London Stock Exchange (LSE) Group. The index is not only the benchmark for small-cap U.S. stocks but is also widely regarded as a bellwether of the U.S. economy because of its focus on the smallest companies in the U.S. market.

IWM is the ticker symbol for iShares Russell 2000 ETF, which is one of the main ETFs that track the Russell 2000 index. The ETF provides a way to invest in the index and gain exposure to small-cap stocks listed on U.S. stock exchanges.

10 largest stocks in the Russell 2000 index

The top 10 largest stocks in the Russell 2000 index include the following stocks:

  1. BIOHAVEN PHARMACEUTICAL HOLDING CO (BHVN): This is a biopharmaceutical company that discovers and develops drugs targeting neurological and neuropsychiatric diseases and rare disorders in the United States. It developed NURTEC ODT (rimegepant) for both acute and preventive treatment of migraine. Its market cap as of July 22, 2022, is $197.207 million, and it contributes 0.37% weight to the index.
  2. SHOCKWAVE MEDICAL INC. (SWAV): This is a medical device company that engages in developing and marketing intravascular lithotripsy technology for the treatment of calcified plaque in patients with peripheral vascular, coronary vascular, and heart valve diseases worldwide. As of July 22, 2022, the company’s market cap is $161.899 million, and it contributes 0.31% weight to the index.
  3. HALOZYME THERAPEUTICS INC. (HALO): This is a biopharma technology company that operates in the United States, Europe, Japan, and other parts of the world. The company’s products are based on the ENHANZE drug delivery technology, which is a patented recombinant human hyaluronidase enzyme (rHuPH20) that enables the subcutaneous delivery of injectable biologics. The company’s market cap is $147.605 million as of July 22, 2022, and it contributes 0.28% weight to the index.
  4. RBC BEARINGS INC. (ROLL): The company manufactures and markets engineered precision bearings and components in the United States and internationally. It produces plain bearings with self-lubricating or metal-to-metal designs, including rod end bearings, spherical plain bearings, and journal bearings. As of July 22, 2022, the company’s market cap is $133.882 million, and it contributes 0.25% weight to the index.
  5. CHART INDUSTRIES INC. (GTLS): The company produces and sells engineered equipment for the energy and industrial gas industries worldwide. It offers bulk and packaged gas cryogenic solutions for the storage, distribution, vaporization, and application of industrial gases. The stock’s market cap as of July 22, 2022, is $133.673 million, and it contributes 0.25% weight to the index.
  6. SOUTHSTATE CORP (SSB): It is the holding company for SouthState Bank, which provides a range of banking services and products to individuals and companies. Its market cap as of July 22, 2022, is $130.139 million, and it contributes 0.25% weight to the index.
  7. MURPHY USA INC. (MUSA): The company engages in the marketing of retail motor fuel products and convenience merchandise. It operates retail stores under the Murphy USA, Murphy Express, and QuickChek brands. The stock’s market cap as of July 22, 2022, is $129.678 million, and it contributes 0.25% weight to the index.
  8. SAILPOINT TECHNOLOGIES HOLDINGS IN (SAIL): The company provides enterprise identity security solutions and offers software as a service (SaaS) and software platforms. As of July 22, 2022, the stock’s market cap is $128.602 million, and it contributes 0.24% weight to the index.
  9. SAIA INC. (SAIA): The company operates as a transportation company in North America, providing less-than-truckload services for shipments between 400 and 10,000 pounds. Its market cap is $123.502 million, and it contributes 0.23% weight to the index, as of July 22, 2022.
  10. TEXAS ROADHOUSE INC. (TXRH): It operates casual dining restaurants. It franchises restaurants under the Texas Roadhouse, Bubba’s 33, and Jaggers names. As of July 22, 2022, the company’s market cap is $123.424 million, and it contributes 0.23% weight to the index.

However, keep in mind that the index is rebalanced annually in June. The next time you check the index the components might be different.

IWM (Russell 2000) trading strategy

We are trading IWM and the relevant futures contract (RTY). The small-caps correlate with the overall stock market (S&P 500), but over time it can deviate significantly.

Let’s look at an IWM (Russell 2000) Trading Strategy we developed years ago:

IWM (Russell 2000) trading strategy

As mentioned, once a year Russell 2000 rebalances its holdings. This has turned out to be a strong period for stocks, and Russell 2000 in particular. We called the strategy Russell 2000 Rebalancing Trading Strategy.

Below is the equity curve and performance:

IWM (Russell 2000) Trading Strategy
IWM (Russell 2000) Trading Strategy

As you can see, the performance is pretty solid. But keep in mind that the overall stock market has also performed well during this period, but Russell’s outperformance is pretty solid. You can also hedge the position against S&P 500 to create a pair trade strategy.

IWM (Russell 2000) Trading Strategy- ending remarks

Diversification is important in trading and IWM might help you in achieving that. IWM trends slightly more than S&P 500 and thus it differs in the parameters you can employ in making trading strategies.

 

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