Investors, it’s time to take a closer look at the Russell 2000 index
How do you gauge the performance of the US small cap market? Do you look at individual company performance? Do you look at unemployment numbers? Perhaps a better way of getting a snapshot of the market’s performance is by looking at the Russell 2000 index.
Here’s what you need to know about it.
What is the Russell 2000 Index?
The Russell 2000 Index comprises 2000 small cap US stocks, hailing from a wide array of sectors including healthcare, financial services, technology, producer durables, and consumer discretionary.
Specifically, it includes the smallest 2000 securities of the 3000 securities in the Russell 3000 index. While the Russell 3000 index represents nearly 98% of the US stock market, the components of the Russell 2000 index represents just 10% of the total market capitalization of the former.
According to FTSE, which offers the index, the Russell 2000 index was created as a “comprehensive and unbiased small-cap barometer”. To ensure that the index is not influenced by larger stocks, it is completely reconstituted on an annual basis and the most recent reconstitution took effect on June 29, 2020.
The 2020 reconstituted Russell 2000 index had a total market capitalisation of US$1.9 trillion, a 19.7% decrease from the US$2.4 trillion in 2019. The largest company in the index is Silicon Laboratories, with a total market cap of US$4.4 billion, while the smallest company is Limestone Bancorp, with a total market cap of US$94.8 million.
227 new companies joined the Russell 2000 Index in the 2020 reconstitution, including 6 newly listed companies from the healthcare sector. At the same time, 175 companies departed the Index. The largest new addition to the index is Mimecast Ltd (Technology) which has a total market cap of US$2.6 billion.
Based on its structure, investors often refer to the Russell 2000 index as a gauge of the performance of the broader American economy which is focused on small-sized domestic-based businesses. This contrasts with other indices, like the S&P 500, which is commonly quoted for large cap stock performance.
So why should investors trade the Russell 2000 index?
The performance of the Russell 2000 index has been one to watch during the current pandemic.
According to Bluford Putnam, Managing Director and Chief Economist of CME Group, the Russell 2000 index was hit the hardest during the February and March months – compared against the large cap S&P 500 index and the technology focused Nasdaq Composite index – when the country started shutting down many parts of the economy to curb the spread of Covid-19.
The 30.6% first-quarter decline for the Russell 2000 was the largest quarterly loss for the small cap index in its more than 40-year history.
Yet in the months after, amid the unprecedented volatility arising from the pandemic, the Russell 2000 index was also the first to recover compared with the other two indices.
Putnam explains that this is a reflection of the evolving circumstances in the US, as all 50 US states started reopening in varying degrees from June 1. “Shutdown in the US disproportionately impacted small businesses. So far, the re-opening has gone relatively smoothly, and so the Russell 2000 index has been buoyed as confidence returns to the US economy.”
How can investors trade the Russell 2000 index?
As with all equity indices, investors cannot invest directly in them. However, they can invest in products that replicate the index, such as index futures.
CME Group research shows that investors have been making full use of the small cap futures market to invest in the current volatility, and they have also been seeking vehicles that can help them improve their portfolio performance while managing risk.
For instance, the average daily volume (ADV) for E-mini Russell 2000 futures rose by 53% in 1H2020 versus the first six months of 2019. ADV for June exceeded 277,000 contracts and average daily open interest in June was more than 575,000 contracts – the highest daily average since August 2018.
Average Daily Volumes (ADV) for E-mini Russell 2000 &
Micro E-mini Russell 2000
If you are relatively new to indices trading or futures trading, and e-mini futures sound too intimidating to start trading with, there is another viable option. CME Group, the creators of the E-mini futures contracts, also offers micro e-mini contracts.
E-mini Russell 2000 futures and Micro E-mini Russell 2000 futures
set new record volume day in mid June
The Micro E-mini Russell 2000 futures (M2K) offers a smaller sized version of the E-mini Russell 2000 futures contract. At one tenth the size of the latter, the Micro E-mini Russell 2000 provides the same exposure to the same 2,000 stocks, at US$5 x the Russell 2000 Index, and with a minimum tick of 0.10 index points. It is also traded more heavily within Asia, and offers more liquidity during Asian trading hours, when compared with the larger E-mini Russell 2000 futures.
Higher Daily Trading Volumes for the Micro E-mini Russell 2000 futures over E-mini Russell 2000 futures in APAC
Greater liquidity in Micro E-mini Russell 2000 market than in the E-mini Russell 2000 market during Asian trading hours*
*Extended trading hours (ETH) refer to the 6am – 9pm time period for Singapore and Hong Kong.
CME Micro E-mini Russell 2000 futures promotion
From now till the end of 2020, you can also enjoy the Phillip Futures US$1.50 promotion. Trade the CME Micro E-mini Russell 2000 (M2K) for just US$1.50 in commissions per side per lot. This promotion is also available for 4 other micro e-mini futures contracts including the CME Micro E-mini S&P 500 (MES) and the CME Micro E-mini Nasdaq-100 (MNQ). You will find more details here.
To enjoy this promotion, you will first need to be a Phillip Futures customer. Sign up for your trading account easily online here, receive your approval within a couple of working days and sign up for the promotion here to get started.
Keeping an eye on the uncertain US market
While the US reopening has buoyed markets, Putnam believes investors need to keep their eyes peeled for the developments from the pandemic. “The future is very uncertain. How the narrative evolves in terms of restaurants, personal services, and small businesses, is going to have a lot to say about how the patterns shift as we go forward,” he concludes.