- Trading the Russell 2000 Index provides exposure to small-cap stocks, which have historically outperformed large-cap stocks over the long-term
- Market participants can trade a wide variety of options, including short-dated weekly options, on the Russell 2000 Index, providing ample choices to manage small-cap risk and reap small-cap rewards
- During inflationary periods, small-cap stocks can be a favorable investment
The Russell 2000 Index is administered, calculated, and published by FTSE Russell and measures the performance of approximately 2000 stocks in the small-cap segment of the U.S. equity universe. Compared to broad based, large-cap indexes, like the Russell 3000 and the S&P 500, the Russell 2000 provides a barometer for small-cap performance, which over the long run have outperformed that of large-caps.
Over the 20-year period from 2000 to 2020, averaging daily return data, the Russell 2000 Index outperformed its large-cap peers by over 30%. Looking at the previous three years, however, the Russell 2000 Index underperformed both the S&P 500 and the Russell 3000 by 10%. These trends indicate that on a short-term basis, small-caps underperform large-cap stocks, but observing a longer time period illustrates that the reverse is true. This trend is significant because it shows the value of incorporating small-cap stocks, or small-cap indexes, like the Russell 2000, into one’s portfolio in the long run.
For instance, if an options trader wants to express their view that small-cap stocks will outperform large-cap stocks over the next five to 10 years, that trader could buy a long out-of-the-money call option. This simple example illustrates how the use of an options strategy gives a trader the flexibility to express their opinion that the index will increase in value in the future while simultaneously limiting losses if the index doesn’t move as expected.
While large-cap indexes have fared extremely well in recent history, low GDP growth rates and elevated levels of inflation in the U.S. economy potentially makes the present day an appropriate time to consider small-cap exposure and options provide a vehicle for executing these small-cap strategies in both the short- and long-term.
Russell 2000 options offering at CME Group
Quarterly, Monthly, and Friday Weekly options on E-mini Russell 2000 Index futures were launched in April 2017, with Monday and Wednesday Weekly options introduced in September 2021, followed most recently by Tuesday and Thursday Weekly options in February 2023. Since 2017, weekly options have represented the majority of options volume in the Russell 2000 suite, with 59% of all options average daily volume coming from the weekly varieties.
To carry out these short-term strategies, weekly options are a useful tool and offer the important benefit of flexibility. If a trader wants to execute a strategy whether the Russell 2000 will move in a certain direction after the next inflation reading, weekly options are a simple yet effective way to capture that market event while managing the risk associated with it.
Benefits of trading small-cap sector, even in an inflationary period
About half the Russell 2000 Index is split between three sectors: industrials, financials, and health care. Both the industrial and financial sectors are cyclical industries, meaning they tend to closely follow the business cycle. While these industries may have experienced slow growth in recent periods, the inevitable economic recovery will undoubtedly have a positive impact on industrials and financials, and eventually the Russell 2000 Index itself.
Additionally, small-cap stocks typically experience higher rates of growths, which inherently makes them more volatile. While this characteristic poses certain risks to investors, small-cap companies have the benefit of being more adaptable and thereby have the ability to react more quickly to current market conditions. For instance, a smaller company is typically nimbler and can potentially be more reactionary with their pricing to the latest inflation readings than a large company. A stronger dollar can also help boost domestic company performance and small-cap stocks. This factor can also potentially explain why large-cap stocks have seen more volatile performance.
These characteristics make small-cap stocks an appealing choice during periods of economic uncertainty, including inflationary periods, like the U.S. is experiencing today.
No better time to trade
U.S. inflation is currently over 6%, yet consumers expect this figure to decline to 5% within the next year, and closer to the Federal Reserve’s inflation target of 2% in the next three to five years, according to the latest Survey of Consumer Expectations. Given small-cap stocks’ historical performance in inflationary environments, there is no better opportunity to consider adding small-caps to one’s portfolio. CME Group’s options on E-mini Russell 2000 Index futures can help market participants express their views on how inflation will impact small-cap stocks moving forward, with the added benefit of capital efficiencies and a liquid underlying contract.
E-mini Russell 2000 Index futures have also seen great success, trading on average nearly 500,000 contracts in open interest each month since their launch in 2017.
Markets are constantly changing, and while no one can predict the future, inflation is likely to level-off, the value of the U.S. dollar will ebb and flow, and new macro trends will come to the forefront of investor’s minds. All of this means that market participants should remain vigilant with their index investments and choose the index that best fits their needs and overall strategy.
Trading the Russell 2000 Index gives market participants a way to trade the small-cap sector, no matter their strategy or outlook. Furthermore, trading options on the iIndex provides a way for participants to express their view on small-cap performance while simultaneously managing risk associated with small-cap stocks.
With the most recent launch of Tuesday and Thursday weekly varieties, options can be traded every day of the week in the Russell 2000 suite at CME Group, offering market participants ample ways to manage small-cap risk and reap small-cap rewards.
To learn more about the Russell 2000 Index, including market performance and recent news, access the Russell 2000 Index Quarterly Chartbook
For more information on how to trade the CME Group’s suite of Russell 2000 products, visit cmegroup.com/Russell2000.
E-mini Russell 2000 Weekly options
Expand the small-cap strategies you can build with more expiries throughout the week. Monday through Friday weekly expirations are now available on E-mini Russell 2000 options.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.