S&P 500 vs. NASDAQ vs. Russell 2000

The S&P 500, NASDAQ, and Russell 2000 are three benchmarks that shape how we understand and measure the US stock market.

Each tells a unique story about different segments of the economy.

Traders and investors often use these indices to gauge market health, build strategies, and make informed decisions about their portfolios.

Key Takeaways – S&P 500 vs. NASDAQ vs. Russell 2000

• S&P 500
  • Tracks 500 large US companies.
  • Offers a balanced sector exposure with moderate risk and long-term stability.
  • Most popular market benchmark due to its balance between value and growth and diversification by sector.
• NASDAQ
  • Tech-heavy, growth-focused, and more volatile.
  • Has provided higher returns historically but higher risk.
• Russell 2000
  • Represents small-cap stocks.
  • Offers high growth potential but with greater volatility.
• Interest Rate Sensitivity
  • NASDAQ and Russell 2000 are more sensitive to interest rate changes than the S&P 500.
• Diversification
  • Using a mix of these indices can help balance risk and growth in portfolios.

S&P 500: The Gold Standard

Composition and Significance

Introduced in 1957, the S&P 500 tracks 500 of the largest publicly traded companies in the United States.

It’s market-cap weighted, which means bigger companies like Apple, Microsoft, and Amazon have a greater impact on its performance.

These 500 companies represent about 80% of the available market capitalization in the US stock market.

Historical Performance

Over the past 50 years, the S&P 500 has delivered an average annual return of around 10%.

This figure includes both bull markets and bear markets, which shows the index’s resilience over time.

During the 2008 financial crisis, it dropped by 37% that year, but then surged by over 400% in the subsequent bull market that lasted until 2020.

Its largest drawdown was 50.9% during the 2008 crisis, lasting from October 2007 to March 2009.

Risk-Return Profile

The S&P 500 is often considered a moderate-risk investment.

Its broad diversification across sectors helps reduce company-specific risks.

The index’s beta is 1.0 by definition, making it the benchmark against which other investments’ volatility is measured.

Large-cap stocks typically experience less dramatic price swings than smaller companies, which contributes to the index’s relative stability.

Proxy for the Economy and Markets

The S&P 500 is often used as a proxy for the US economy because it includes 500 of the largest publicly traded US companies, covering a wide range of sectors.

Its performance is thought to reflect the overall health and growth of the US economy.

This nonetheless has flaws.

The S&P 500 is heavily weighted towards large-cap stocks, overlooking smaller companies.

It doesn’t include private businesses or the entire US bond market, which are significant parts of the economy.

Additionally, stock prices can be influenced by factors beyond economic fundamentals, like investor sentiment.

The S&P 500 also includes international performance.

Roughly 40% of S&P 500 company revenue comes from international sources, which highlights their significant global exposure.

NASDAQ: Tech-Heavy Growth Engine

Composition and Characteristics

The NASDAQ Composite includes over 3,000 stocks listed on the NASDAQ exchange, but it’s dominated by technology companies.

As the world’s first-ever electronic index established in 1971, the index has a significant tilt toward growth stocks, with many companies reinvesting profits into expansion rather than paying dividends.

This makes it markedly different from the more balanced S&P 500.

Performance Dynamics

NASDAQ historically delivers higher returns than the S&P 500, but with greater volatility.

During the dot-com bubble of the late 1990s, the NASDAQ soared by 582% before losing around four-fifths of its value between 2000 and 2002.

More recently, it’s been a powerhouse – from 2010 to 2020, the NASDAQ returned about 20% annually, significantly outpacing the S&P 500.

Risk Considerations

The tech-centric nature of the NASDAQ makes it more susceptible to sector-specific risks.

Interest rate changes particularly impact growth stocks, as their valuations often rely on future earnings potential.

This gives the index a longer duration, and greater interest rate sensitivity.

The NASDAQ’s beta typically ranges between 1.2 and 1.4 – i.e., higher volatility than the broader market.

Investors have to stomach larger swings for the potential of higher returns.

Russell 2000: Small-Cap Dynamism

Index Breakdown

The Russell 2000 represents 2,000 smaller public companies.

These are the smallest members of the Russell 3000, which covers 98% of the US equity market.

The average market cap of a Russell 2000 company is around $3 billion, compared to over $30 billion for the S&P 500.

Performance Characteristics

Small-cap stocks often outperform during economic recoveries and periods of domestic economic growth.

The Russell 2000 historically generates higher returns than large-cap indices over very long periods, but with much more volatility.

Since its inception in 1984, the index has delivered average annual returns of approximately 11-12%, slightly above the S&P 500.

Over more recent history it has lagged the S&P 500 and should generally expect to give a bumpier ride.

Risk-Return Tradeoff

The Russell 2000’s beta typically ranges from 1.2 to 1.5, reflecting its higher volatility.

Small-cap stocks are more sensitive to economic cycles and can experience sharp selloffs during market stress.

They’re also less liquid than large caps, which can amplify price movements.

However, these companies often have more room for growth, potentially offering higher returns to compensate for the increased risk.

Comparative Analysis

Sector Exposure

• S&P 500 – Balanced across sectors, with technology representing about 25-35% of the index.
• NASDAQ – Heavily weighted toward technology (45%+) and consumer discretionary sectors.
• Russell 2000 – More exposure to financial, industrial, and healthcare sectors. Less technology-focused than the other two.

Dividend Characteristics

• S&P 500 – Steady dividend payments, with many companies being “Dividend Aristocrats.” Dividend yield is typically 1.5%-2%. There are dividend-oriented versions of the S&P 500 for those looking for that, which we’ll cover later in the article.
• NASDAQ – Lower dividend yields due to growth focus.
• Russell 2000 – Variable dividends, with many companies not paying any.

Trading Volume and Liquidity

The S&P 500 and NASDAQ components typically see high trading volumes, making them extremely liquid.

Russell 2000 stocks often have lower trading volumes, which can impact the ability to quickly enter or exit positions without affecting prices.

Trading and Investment Implications

Portfolio Construction

Some investment professionals might recommend using a combination of these indices for proper diversification.

One such approach might be:

• 60-70% in S&P 500 for core exposure
• 15-20% in NASDAQ for growth potential
• 10-15% in Russell 2000 for small-cap exposure

Others might simply recommend choosing the S&P 500, given its greater balance and stability than the other two.

This allocation can be adjusted based on:

• Risk tolerance
• Timeline
• Economic outlook
• Age and financial goals

Choosing the Right Index

Consider these factors when selecting index exposure:

• S&P 500 – Best for stable, long-term core holdings
• NASDAQ – Ideal for growth-oriented investors comfortable with volatility
• Russell 2000 – Suitable for those seeking more aggressive growth in smaller companies

Dividend-Focused Version of These Indices

Here are some of the most popular dividend-focused S&P 500 funds:

ETFs

• SPYD (SPDR Portfolio S&P 500 High Dividend ETF) – This ETF tracks the S&P 500 High Dividend Index, which includes the 80 highest-yielding dividend stocks in the S&P 500.
• SDY (SPDR S&P Dividend ETF) – Tracks the S&P High Yield Dividend Aristocrats Index, which includes S&P 500 companies that have consistently increased dividends for at least 20 consecutive years.
• VIG (Vanguard Dividend Appreciation ETF) – Tracks the NASDAQ US Dividend Achievers Select Index. Includes companies with a record of increasing dividends for at least 10 consecutive years.
• DVY (iShares Select Dividend ETF) – This ETF tracks the Dow Jones US Select Dividend Index. Includes 100 stocks selected based on dividend yield, payout ratio, and dividend growth.
• NOBL (ProShares S&P 500 Dividend Aristocrats ETF) – This ETF tracks the S&P 500 Dividend Aristocrats Index, which is similar to SDY’s underlying index.
  

Mutual Funds

• VDAIX (Vanguard Dividend Appreciation Index Fund Admiral Shares) – This mutual fund is similar to VIG, tracking the NASDAQ US Dividend Achievers Select Index.
• FSDIX (Fidelity Equity-Income Fund) – Invests in large-cap stocks with a history of paying dividends.
• MUTFX (MFS Value Fund) – Invests in undervalued large-cap stocks, many of which pay dividends.

Factors to Consider When Choosing a Dividend-Focused Fund

• Dividend yield – This is the annual dividend payment per share divided by the share price.
• Expense ratio – This is the annual fee charged by the fund to cover its operating costs. For example, if a fund has an expense ratio of 0.10%, that’s $10 in fees per year for every $10,000 invested. 
• Dividend growth – This is the rate at which the fund’s dividends have been increasing over time.
• Strategy – Some funds focus on high-yield stocks, while others focus on dividend growth or a combination of factors.

It’s important to research and compare different funds before investing to find the best fit for your individual needs and goals.

Market Dynamics and Interest Rate Sensitivity

Economic Sensitivity

Each index responds differently to economic changes:

• Russell 2000 is highly sensitive to domestic economic conditions.
• S&P 500 is influenced by both domestic and international factors.
• NASDAQ often moves based on tech sector sentiment and innovation cycles. Overhype tends to lead to drawdowns or underperformance. Generally more sensitive to recessions than the S&P 500.

Interest Rate Impact

Rising interest rates typically affect these indices differently:

• Russell 2000 companies, often more dependent on financing, may struggle.
• NASDAQ growth stocks usually face pressure as future earnings are discounted more heavily.
• S&P 500 tends to be more resilient, especially sectors like financials that can benefit from higher rates.

Alternatives to the S&P 500, NASDAQ, and Russell 2000

Here are some alternatives to the S&P 500, NASDAQ, and Russell 2000, each with its own characteristics and potential benefits:

Broader Market Indexes

Wilshire 5000

This index covers nearly all publicly traded US stocks, offering the most comprehensive view of the US market.

It includes large, mid, and small-cap stocks.

• Why it’s different – More truly captures the entire US market, unlike the S&P 500 which focuses on large-cap companies.
• Example ETF – VTI (Vanguard Total Stock Market Index Fund ETF)

MSCI USA Index

Similar to the Wilshire 5000, it captures a broad range of US equities and is often used as a benchmark for US equity performance.

• Why it’s different – Slightly different weighting methodology compared to the Wilshire 5000, may have minor differences in performance.
• Example ETF – SCHB (Schwab US Broad Market ETF)

Dow Jones Industrial Average (DJIA)

This index tracks 30 large, publicly owned companies based in the United States.

The Dow Jones Average (DJA) goes back to 1885 and the Dow Jones Industrial Average (DJIA) goes back to 1896.

It’s one of the oldest and most widely followed equity indexes in the world.  

• Why it’s different:
  • Price-weighted – Unlike most indexes that are market-cap weighted, the DJIA is price-weighted, meaning higher-priced stocks have a greater influence on the index value.  
  • Limited scope – It only includes 30 companies, which are considered “blue-chip” stocks across various industries. This makes it a less representative measure of the overall US market compared to broader indexes.  
  • Historical significance – Provides a long-term perspective on market trends.  
• Example ETF: DIA (SPDR Dow Jones Industrial Average ETF Trust)

Related: Dow Jones Flaws

Factor-Based Indexes

Value Indexes

These focus on companies considered undervalued relative to their fundamentals (e.g., book value, earnings).

• Why it’s different – Emphasizes companies with potential for price appreciation, often with higher dividend yields.
• Example ETF – IWD (iShares Russell 1000 Value ETF)

Growth Indexes

These track companies with high growth potential, often in innovative sectors.

• Why it’s different – Targets companies expected to grow revenue and earnings at above-average rates.
• Example ETF – IWF (iShares Russell 1000 Growth ETF)

Momentum Indexes

These focus on stocks that have been performing well recently, betting on the trend continuing.

• Why it’s different – Tries to capture upward price trends, can be more volatile.
• Example ETF – MTUM (iShares MSCI USA Momentum Factor ETF)

International Indexes

MSCI EAFE Index

Tracks developed markets in Europe, Australasia, and the Far East.

• Why it’s different – Provides exposure to developed economies outside the US, offering diversification benefits.
• Example ETF – EFA (iShares MSCI EAFE ETF)

MSCI Emerging Markets Index

Tracks companies in developing economies.

• Why it’s different – Offers higher growth potential but with greater risk compared to developed markets.
• Example ETF – EEM (iShares MSCI Emerging Markets ETF)

FTSE 100 Index

Tracks the 100 largest companies listed on the London Stock Exchange.

• Why it’s different – Focuses on the UK market, providing exposure to a specific region.
• Example ETF – EWU (iShares MSCI United Kingdom ETF)

Sector-Specific Indexes

Energy Select Sector SPDR Fund (XLE)

Tracks the energy sector of the S&P 500.

Technology Select Sector SPDR Fund (XLK)

Tracks the technology sector of the S&P 500.

Important Notes

Diversification

Don’t put all your eggs in one basket.

Combining different types of indexes can help reduce risk.

Risk Tolerance

Consider your own risk tolerance when choosing alternatives.

Emerging markets and sector-specific indexes tend to be more volatile.

Research

Do your own research before investing in any index or ETF.

Understand the index methodology, expense ratios, and potential risks.

Measuring Strategies Against the S&P 500, NASDAQ, and Russell 2000

Traders and investment managers often measure their strategies against benchmarks like the S&P 500 and NASDAQ to evaluate their performance relative to the market and assess whether they’re adding value.  

Relevant Cases

• Active management – When a manager aims to outperform a specific benchmark by actively selecting stocks. Comparing their returns to the benchmark helps determine their success.  
• Passive management – Even passive index funds use benchmarks to track their target index closely, ensuring they replicate its performance.  
• Performance attribution – Analyzing how different investment decisions contribute to overall performance relative to the benchmark.  
• Client reporting – Communicating performance results to clients in a clear and understandable way by comparing them to a relevant benchmark. Most common for long-only equity mutual funds.

Not Relevant Cases

• Absolute return strategies – Hedge funds or strategies focused on generating positive returns regardless of market conditions may not prioritize benchmark comparisons. For example, if a sovereign wealth fund targets CPI+500bps (i.e., the domestic inflation rate + 5%), they won’t care about the S&P 500.
• Strategies with specialized risk profiles – Strategies with different risk profiles won’t be very relevant to equity indices due to the different volatility and tail risk properties. 
• Hedging strategies – For strategies that are focused on hedging, then measuring relative to an equity benchmark isn’t going to be too relevant.
• Other asset classes – A long-only bond manager would be more likely to compare relative to a representative bond benchmark, not an equity benchmark.
• Highly specialized strategies – Strategies with unique investment universes (e.g., early-stage venture capital) may not have a suitable benchmark for comparison.
• Long-term investing – Investors with very long time horizons may be less concerned with short-term fluctuations relative to a benchmark.

Related: Is Beating the S&P 500 Important?

Conclusion

Understanding the nuances between these indices is important for those who trade or invest in them or use them as benchmarks.

The S&P 500 offers stability and consistent returns, the NASDAQ provides exposure to high-growth technology, and the Russell 2000 captures the dynamism of smaller companies.

Each has its niche in the ecosystem of the US stock market, and together they provide ways to build diversified portfolios tailored to their specific goals and risk tolerance.

Summary Statistics – S&P 500 vs. NASDAQ vs. Russell 2000

From the statistics shown below we can see that the S&P 500 tends to be the most stable, the NASDAQ has higher expected returns at higher risk, and the Russell 2000 is less reliable, though it can perform better in certain environments.

Risk and Return Metrics

Related

• S&P 500 ETF vs. S&P 500 Futures