For the Biggest Gains, Think Smaller

Editor's note: If you want to beat the market, you might want to look outside the biggest stocks. That's according to Joel Litman of our corporate affiliate Altimetry. In today's issue, adapted from a May 2024 issue of the Altimetry Daily Authority e-letter, Joel explains how one man changed Wall Street forever – and how you can find the market's hidden gems before they become household names.

George Russell only wanted to make his grandfather proud...

He didn't plan to change the entire investing industry.

George started working at his grandfather's business, Frank Russell Company, in 1958. Although it had been around for more than two decades, it was still pretty much a one-man show...

Frank Russell had started the business as a retired Wall Street stockbroker just looking to keep busy. He only worked with a handful of local clients.

George joined the team after graduating from Harvard Business School. But he didn't have much time to adjust. Three months later, his grandfather died... and George found himself at the helm.

The company he helped build now manages nearly $400 billion in assets under management.

As you'll see, George transformed all of Wall Street during his long career...

During George's first decade leading the business, pension funds were booming...

Companies would invest money on behalf of their employees to set them up for retirement. There was a problem, though... A lot of funds struggled to pick good investments.

None of these pensioners knew what they were looking at. That's because pension funds had a tough time getting good data on their investments. So their managers and brokers would all come up with different numbers.

That made measuring performance a hassle.

To help solve this problem, George created the Portfolio Activity Report, the gold standard for measuring pension performance.

The report tracked a fund's holdings, buys, and sells. It was a crucial single source of information for fund managers.

Why the Russell 2000 Is an Index to Watch

George and the team soon realized there was a lot of demand for a stock-data "one-stop shop." So the company began building indexes that tracked stock performance uniformly. Pension funds could then use the data to make better investment decisions.

Even back in the 1980s, pension funds weren't satisfied with just doing better...

They wanted to beat the S&P 500 Index. To do that, investors had to look outside the S&P 500.

So the Russell team took all the companies it could track – about 3,000 in total – and turned that data into its own index.

Most folks these days are familiar with the Russell indexes. The Russell 3000 is still pretty much the definitive universe of investible U.S. companies.

George and the team broke that up into two smaller indexes. They expected the Russell 1000 to be the more popular one. Since it holds the 1,000 largest publicly listed U.S. stocks, it's closer to the S&P 500.

But to their surprise, the Russell 2000 became the crowd favorite.

Investors loved this list of smaller, less-covered stocks. Folks realized that while these stocks were small, they could soon grow to be in the Russell 1000... or even the S&P 500.

It gave them a chance to buy in earlier than ever.

It's still a huge deal for stocks to join the Russell 2000...

It helps them gain legitimacy, meaning a lot more investors can start buying in.

In fact, many institutional funds are required to buy what's in the Russell 2000. It's the best way to track the index's performance.

And since investors are starting much closer to the ground floor... there's a lot more room for shares to run.

The S&P 500, the Nasdaq, and the Dow are still the world's most popular stock indexes. But the Russell provides some of the best investment-universe data out there.

If you're looking for some great hidden gems, start your search in the Russell 2000. Plenty of the smallest stocks are just waiting to grow into the larger indexes.

Regards,

Joel Litman

Editor's note: Joel Litman says April 30 will be the most profitable day of 2026. That's because of a little-known financial mandate that sets a $10 trillion market move in motion every year... catapulting a select group of stocks higher. Right now, Joel is revealing how you too can profit from this move – but you have to act before the window of opportunity closes.