The Russell US Indices were reconstituted at close of trading on Friday, June 28, concluding an annual seven-week process during which FTSE International Ltd, the index administrator, made rule-based changes to their composition to ensure they remain accurately reflective of market conditions. The newly rebalanced Russell US Indices took effect on Monday, July 1, 2019, and will remain in place for 12 months.
Among them, the Russell 1000®, 2000®, and 3000® contain some or all of a total 3,000 stocks, representing a combined 98 percent of the investable US equity market. The large-cap Russell 1000® accounts for 92.4% of Russell 3000® aggregate market cap; the small-cap Russell 2000® accounts for 7.6%1.
Source: FTSE Russell. As at May 10, 2019.
Year-to-year changes in the breakpoint between the Russell 1000® and the Russell 2000®, i.e., the market capitalization that demarcates the boundary between large-cap and small-cap sectors, make a useful gauge of secular growth in market valuations. Reflecting a challenging 12 months for US small-cap shares, the latest Reconstitution saw the breakpoint decrease to $3.6 billion from $3.7 billion in 2018. See Exhibit 2.
The lower bound of the Russell 2000® is likewise indicative. At this year’s Reconstitution, the threshold market capitalization for a new index member was around $152.3 million; in 2018 it was $159.2 million, 4.5% higher.
Approximately $9 trillion of equity market exposure is benchmarked to the Russell US Indices, with countless ETFs and mutual funds mirroring the composition of the Index suite. At annual Reconstitution, Index funds that track the Indices must sell all stocks that are deleted and buy all stocks that are added. Within any Index, moreover, incumbent stocks that remain after Reconstitution typically exhibit changes in their Index weights. All of this creates risk through slippage and possible tracking error. But it also creates opportunities, if only because changes in aggregate Russell 2000® market cap are intertwined with relative gains and losses among the Index’s constituent GIC sectors.
Since 2017, when the E-mini Russell 2000® Index futures returned to CME, the sectoral composition of the Russell 2000® has moved dramatically from one annual Reconstitution to the next. See Exhibits 3 and 4. This year, for instance, the consumer staples and technology sectors enjoyed significant additions.
E-mini® Russell 2000® Index (RTY) futures are a cost-efficient tool for shifting risk, and a convenient alternative to cash market instruments. Among RTY’s market characteristics are deep liquidity and substantial open interest -- two key features for anyone concurrently trading futures and cash index exposures. See Exhibit 5. Provisions for exchange-for-physical (EFP) transactions, block trading, and Basis Trade at Index Close (BTIC) transacting ensure that multiple avenues are open to contract users for position entry and exit.3
In addition to allowing market participants to hedge macro exposures or anticipated directional movements in the Russell 2000® Index, RTY futures can provide a cost-efficient vehicle to assist with market capitalization spread strategies. For example, a portfolio manager expecting small-cap stocks to outperform large-cap stocks could enter an intermarket spread strategy combining purchase of RTY futures and sale of an equivalently-sized number of CME E-mini S&P 500 Index (ES) futures contracts. At this writing, the CME Clearing margin spread credit is 80% for a position scaled to 2 RTY long (short) versus 1 ES short (long).4
RTY futures likewise can furnish users with a means to utilise intra-market price discrepancies. A trader can enter a calendar spread, for example, by buying September RTY contracts and selling an equivalent exposure in December RTY contracts, if an opportune price discrepancy emerges between the two delivery months.5
The Exchange’s listings include companion options on RTY futures, enabling a wide array of option spread strategies and Russell 2000® Index volatility plays. CME also offers futures products based on the Russell 2000® Growth Index and the Russell 2000® Value Index, potentially useful for many purposes, including cash equitization solutions and tactical asset allocation.
This information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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