Cboe recently strengthened its strategic relationship with FTSE Russell, a leading provider of market capitalization weighted indices, by extending its 2015 exclusive licensing agreement through 2030. As we look forward to the next decade of innovation with FTSE Russell, we’re looking back on the past five years of this great collaboration.
Comparing the Russell 1000® Index and the Russell 2000® Index
FTSE Russell provides benchmarks measuring the performance of the largest 3,000 U.S. companies — representing approximately 98 percent of the investable public equity market.
The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe, that is, the smallest 2,000 companies in the Russell 3000 Index. These companies have an average market capitalization of $3.6 billion, representing about 8% of the total U.S. equity market. Conversely, the Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity market, or the largest 1,000 companies in the Russell 3000.
Typically, we see small-caps perform well when the economy is booming, providing investors with higher returns and higher risk. Small-caps can sometimes provide a better glimpse of how the economy is doing, as smaller companies tend to derive most of their business activity domestically. Large-caps are also heavily concentrated in the technology sector, which may not always reflect the economy at large.
This year’s performance in the Russell 1000® Index (as of April 28) is down 11.74% versus performance in the Russell 2000 Index, which is down 22.2% (as of April 28). The performance divergence highlights factors that contribute significantly to the different opportunity sets offered to investors.
- Technology companies in the Russell 2000 Index are underweighted and causing significant underperformance relative to the Russell 1000®
- Financial Services and Utilities sectors have greater representation in the Russell 2000 Index
Russell 1000® and Russell 2000® Index Performance (2010 – 2019)
Recently, annual returns have been more favorable toward the Russell 1000®, reflecting the growth in valuations within the Technology, Media and Telecom sectors — particularly in the “FAANG” stocks (Facebook, Amazon, Apple, Netflix, and Google), which collectively represent almost 10% of the Russell 1000® Index.
Annualized Standard Deviation
As an asset class, the Russell 2000® small-cap Index carries a higher risk than its large-cap counterpart, the Russell 1000® Index. Small-cap companies are more highly indebted companies with higher P/E ratios. The table below highlights the annualized standard deviation premium of the Russell 2000® relative to the Russell 1000® on a consistent basis.
Volatility Comparisons – VIX Index vs. RVX Index
Alternatively, volatility can be measured by the expected 30-day volatility on large-cap versus small cap, offering insight on bullish/bearish sentiment for each market segment. By comparing the Cboe Volatility Index (VIX Index), which is based on the S&P 500 Index, with the Cboe Russell 2000® Volatility Index (RVX), we see the RVX Index on average carries a 3.30 premium over the VIX Index. The spread recently peaked at 14.61 on March 16, 2020.
FTSE Russell Ecosystem at Cboe:
Cboe options based on FTSE Russell indices offer liquid and transparent markets, alternative capital-efficient investment tools and effective risk management tools.
Cboe lists options on the Russell 1000® Index family (Russell 1000, Russell 1000 Growth, Russell 1000 Value), Russell 2000® Index and FTSE 100 Index. These cash-settled index options trade exclusively on Cboe exchanges providing investors with:
- Liquid and transparent markets
- Alternative capital efficient investment tools
- Effective risk management tools
Through our collaboration with FTSE Russell, Cboe also developed the Cboe Russell 2000® Volatility IndexSM (RVXSM) as a key measure of market expectations of near-term volatility conveyed by Russell 2000® stock index option prices.
Cboe Russell 2000® Benchmark Indices
Cboe created several strategy benchmarks to provide investors with a measure of the relative performance of Russell 2000® Index-based options strategies.
The data on Cboe Russell 2000® Strategy Benchmark Indices suggests that RUT options-based strategies delivered Russell 2000® type returns that expand the mean variance efficient frontier, help manage tail risk and capture volatility risk premium. Read more about the study on our website.
Future Opportunities – FTSE Russell Index Options
Cboe’s partnership with FTSE Russell over the last five years has been an excellent opportunity to work in tandem to deliver meaningful tools for the investment community. In this next phase, we aim to drive greater volume and liquidity in the Cboe FTSE Russell product suite through expanded product offerings, including the potential for new options on nearly two dozen additional FTSE Russell indices, as well as education, content and services for customers and market participants.
Join us May 12 for a Cboe Webinar with FTSE Russell and CME Group: U.S. Small Caps & the Global Pandemic
We are living through a historical time of unprecedented market volatility. With U.S. small caps among the most volatile of asset classes, traders and investors are questioning how to make sense of the markets and develop a strategy for today and tomorrow.
- Will the roller coaster ride continue for US equity markets and small caps in particular?
- Is now the right time to stay invested or invest in US small caps?
- What tools and strategies can I use to help manage the ups and downs?
Leading global index provider FTSE Russell is joined by Steven DeSanctis, Jefferies U.S. Small & Mid Cap Equity Strategist, and index derivatives partners Cboe Global Markets (Kevin Davitt, Options Institute Sr. Instructor) and CME Group (Tim McCourt, Managing Director) to examine the current state of the small cap equity market and practical strategies and tools for managing through unprecedented levels of market volatility.
The panel of speakers will cover a wide range of topics, including:
- Current market environment for US small caps
- Historical perspective on US small cap performance in significant market downturns
- Practical investment and protection strategies for addressing market volatility
To register for the webinar, visit https://www.brighttalk.com/webcast/9819/405392