What Is the Russell 3000 Growth Index and How Does It Work?

Stock market indexes help investors track specific segments of the market, and the Russell 3000 Growth Index focuses on growth-oriented companies. It includes stocks from the broader Russell 3000 Index that exhibit characteristics of growth investing, such as strong revenue expansion and high valuation multiples.

Market Classification Criteria

The Russell 3000 Growth Index is constructed using a rules-based methodology that classifies stocks based on financial characteristics. A company’s inclusion depends on its classification within the broader Russell 3000 Index, which represents about 98% of the investable U.S. equity market. FTSE Russell applies a style classification process to determine whether a stock belongs in the growth or value segment.

Market capitalization is a key factor, with larger companies having a greater influence on index performance. Stocks with higher prices and significant investor interest contribute more to index movements. Liquidity is also considered to ensure sufficient trading volume for investability.

Beyond size and liquidity, the methodology incorporates a ranking system that assigns stocks to either the growth or value category. Some stocks exhibit characteristics of both, leading to a proportional allocation between the two indexes. For example, a stock classified as 70% growth and 30% value will have a corresponding weight in each index.

Growth Factor Considerations

Stocks in the Russell 3000 Growth Index are selected based on financial characteristics indicating strong expansion potential. The classification relies on earnings performance, valuation levels, and revenue trends.

Earnings-Based Metrics

Earnings growth is a primary criterion. Companies with consistently rising net income and strong earnings per share (EPS) expansion are more likely to qualify. FTSE Russell evaluates historical and projected earnings growth rates, often using a multi-year average to smooth fluctuations.

For example, a company with a five-year EPS compound annual growth rate (CAGR) of 15% is more likely to be included than one with a 5% CAGR. Firms with high reinvestment rates—allocating a significant portion of earnings to research and development (R&D) or capital expenditures—often exhibit growth characteristics.

Return on equity (ROE), calculated as net income divided by shareholder equity, is another key measure. A high ROE, particularly when driven by revenue growth rather than excessive leverage, suggests a company is efficiently generating profits. Analysts’ forward-looking earnings estimates also influence stock classification.

Valuation Ratios

Growth stocks typically trade at higher valuation multiples than value stocks, reflecting investor expectations of future earnings expansion. The Russell 3000 Growth Index incorporates metrics such as the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and price-to-sales (P/S) ratio.

A company with a P/E ratio of 30 is generally considered a growth stock if its earnings are expected to rise significantly. In contrast, a stock with a P/E ratio of 10 may be classified as value-oriented. The P/B ratio, which compares a company’s market price to its book value, is another important indicator. Growth stocks often have P/B ratios above 3.0, as investors are willing to pay a premium for strong intangible assets like brand value or intellectual property.

The price-to-sales ratio is useful for evaluating firms in early growth stages that may not yet be profitable. A high P/S ratio, often above 5.0, suggests that investors anticipate strong future revenue expansion. However, excessive valuations can indicate speculative risk, making it important to assess these ratios alongside earnings trends and industry benchmarks.

Revenue Trends

Sustained revenue growth is a defining characteristic of companies in the Russell 3000 Growth Index. Firms with increasing top-line figures, particularly those outpacing industry averages, are more likely to be classified as growth stocks. Revenue growth is typically measured year-over-year (YoY), with a focus on both historical performance and forward-looking projections.

For example, a technology company with a 20% YoY revenue increase may be considered a strong growth candidate, especially if it operates in a high-demand sector such as cloud computing or artificial intelligence. In contrast, a company with flat or declining revenue is less likely to be included, even if it has strong profitability metrics.

Companies with recurring revenue models, such as subscription-based businesses, often receive higher growth classifications due to their predictable income streams. Additionally, firms expanding into new markets or launching innovative products may see accelerated revenue growth, reinforcing their placement in the index.

Calculation Components

The Russell 3000 Growth Index is a market-capitalization-weighted index, meaning each stock’s influence is determined by its total market value. The calculation process begins with the individual market capitalizations of all constituent companies, derived by multiplying each stock’s share price by its total number of outstanding shares. These values are then aggregated to determine the total market capitalization of the index.

Once the total market cap is established, each stock’s weight is calculated as its market capitalization divided by the index’s total market value. This ensures that larger companies exert more influence on index performance, while smaller firms contribute proportionally less. Unlike equal-weighted indexes, where each stock holds the same importance, this methodology reflects real-world market dynamics.

FTSE Russell employs float-adjusted market capitalization, which excludes shares not freely tradable in public markets. This adjustment removes insider holdings, government-owned shares, and other restricted stock to ensure only publicly available shares impact the index’s composition.

Dividend reinvestment also affects index calculations. The Russell 3000 Growth Index measures total return and price return separately, with the total return version assuming that dividends are reinvested in the index. This allows investors to assess performance with and without the impact of dividend income.

Reconstitution Steps

The Russell 3000 Growth Index undergoes an annual reconstitution in late June to ensure it accurately reflects the evolving landscape of growth-oriented stocks. Preliminary announcements are released in the preceding weeks to provide transparency to market participants. The process involves a comprehensive review of all eligible U.S. equities, reassessing company classifications based on updated financial data and market conditions.

FTSE Russell compiles a ranked list of securities, evaluating whether existing constituents still meet the criteria and identifying new entrants that exhibit stronger growth characteristics. Companies that have experienced a decline in revenue momentum or a shift toward value-oriented fundamentals may be reassigned to the Russell 3000 Value Index or removed entirely. Similarly, firms with sustained top-line expansion and increased investor demand may be newly added, altering the composition of the index.

Stock weightings are recalibrated to reflect changes in market capitalization. Mergers, acquisitions, or corporate restructurings that impact a company’s publicly available shares are accounted for, ensuring that index calculations remain representative of actual market conditions. The reconstitution process also mitigates style drift, preventing stocks from remaining in the wrong classification due to outdated data.