Greetings traders from all around the world.
Thank you for joining me again.
Chris here bringing you another Survival Guide episode.
Today, we're going to be covering the Russell 2000.
So without further ado, let's get going.
Most people will tell you that they've heard of the S&P 500,
or the Dow Jones Industrial Average, but when it comes to
the Russell 2000 Index, it's a little bit of a mystery to
most people, including some traders.
So today it's our goal to cover what the Russell 2000 is,
as well as some of the various tradable instruments that
stem from it.
So what is it?
Well, the Russell 2000 is an index measuring the performance
of approximately 2,000 small cap American companies in the
Russell 3000 Index, which is made of 3,000 of the largest U.S. stocks.
The Russell 2000 is a market cap weighted index.
By the numbers, let's take a look at the index characteristics
of the Russell 2000, compared to the Russell 3000. The Russell 2000
has a price book of 1.64 compared to the 2.70 over here
of the Russell 3000.
The dividend yield would be a 1.92 compared to the 2.28, the
earnings, 13.81 verses 16.62, and our growth over five years;
11.06 versus 13.7. Then, our number of
holdings would be 1979 compared to 2976.
When we go down into market capitalization, in billions of
dollars of course, we have the Russell 2000 again on the
left, and the Russell 3000 on the right. The Russell 2000 average
market cap was 2.053 billion dollars,
whereas comparatively we have a 244 billion
dollar cap with the 3000. The median market cap with the Russell
2000 was .49, with the Russell 3000 was 1.158,
and with the largest stock by market cap,
we have an 11.22 versus a 1208.503.
The long story short here,
obviously the Russell 3000 is going to represent a larger
portion financially of the market, but both are very liquid
indexes in general. You might be sitting there wondering why
in the world would I care about the Russell 2000? Or, why would
any investors care about the Russell 2000 if there's a bigger,
badder, older brother called the Russell 3000 that has a higher
market cap and more money, in terms of the companies that
make up the index?
Well, it's common for investors to compare small cap mutual
fund performances with the Russell 2000 Index, due to the
fact that it reflects the return opportunity presented by
the entire subsection of that market, instead of opportunities
offered by narrower indices, which might contain certain
biases, or perhaps, more stock specific risks that can distort
a fund manager's results.
So essentially, the Russell 2000 can allow traders to get
a more accurate view of the smaller cap stocks,
when compared to using the Russell 3000, which obviously isn't
made up of the smaller cap stocks.
The fact that the Russell 2000 is comprised of small cap
stocks means it is a highly dynamic instrument, which can
unlock substantial profit opportunities for the trader.
What is typical for small cap companies is that they are
usually leaders in terms of innovation and growth. The small
size of their operation grants them the flexibility to new
regulations, changing market environments, chances to adopt
new technologies, et cetera, et cetra.
During market expansions and periods of economic growth, small
companies do tend to perform better and grow quicker.
Something else to take note of is, one of the reasons that
traders flock to the Russell 2000 is the added volatility
that the market might display, being made up of small cap
companies. That's largely due to things that small companies
are more susceptible to, such as high sensitivity to labor
costs and wage growth, or the more likelihood of being funded
by government credits, which makes them more vulnerable to
interest rate changes.
Some key facts about the Russell 2000 at a glance would be
that the Russell 2000 was created in 1984 by the Frank Russell
Company, and is currently maintained by the FTSE Russell, which
is a subsidiary of the London Stock Exchange Group. The index
represents around 8-10% of the total market
cap of the Russell 3000. Many mutual funds and ETFs are tied
to, or based on, the Russell 2000. As we continue down our fact
street, the Russell 2000 is comparable to other small cap
indices, like the S&P 600. Despite similarities,
the Russell 2000 has overtaken the S&P 600 to become the more
popular choice amongst the investing world, both as a benchmark
and as a small cap investment tool. Many view the Russell
2000 as an important measure of the American economy because it
measures the performance of smaller, domestically focused businesses.
There are some key differences that separate
the Russell 2000 from others that we already mentioned, such
as the Dow Jones Industrial Average at the beginning.
The Russell 2000 is weighted by shares out standing, just
right off the bat separating it from the DJIA.
This means that a member stocks last sale price, as well as
the number of shares that can actually be traded rather than
the company's full market capitalization, influence the index.
When we continue further, the Russell 2000 also pays attention
to the performance of companies with special characteristics.
An example of this would be the growth and value index.
The growth index measures the performance of Russell 2000 companies
with higher price-to-book ratios and higher forecasted
growth values, where the Russell 2000 value index
measures the performance of Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values.
Other than that, it also benchmarks small cap stocks.
And when I say it, of course we're talking about the Russell 2000.
The popular S&P 500 and the DJIA track large-cap stocks in comparison.
At this point, you're probably wondering well, can I trade
the Russell 2000? The answer is yes, we can. The Russell
2000 Index can be made investible by mirroring the index
using component shares, or through index futures, mutual funds
exchange trading funds, which we know is ETFs such as the
Russell 2000 ETF, and there are also options available for
IWM and Russell 2000 Index Futures for those of you that love your options.
Continuing on with the topic of trading the Russell 2000,
on July 10th of 2017, the CME Group began offering the e-mini
Russell 2000 Futures Contract. The ticker symbol for this
if you're looking, is going to be RTY.
The instrument has quickly become a preferred choice for
investors willing to get cost-efficient exposure to small cap U.S. stocks.
Once again, the appeal with small cap stocks would be the appeal
of small cap companies. The volatility there is attractive
for those looking to make extreme gains in relatively short
periods of time. Then in May of 2019, the CME introduced the
micro e-mini Russell 2000 Future, which is known as the M2K
as far as the ticker symbol goes. The contracts here are 1/10th
of the size of the RTY, and replicate the movement of its
bigger counterpart entirely.
What this means to us, is if we don't have the capital
to safely execute trading the RTY, all of a sudden big brother
CME came along and provided a cheaper alternative to trade the same market.
Now, let's go ahead and take a look at an e-mini Russell 2000 Futures Contract.
These are some of the specifications that, as always, if you're
ever curious you can go over to the CME Group page and find
all of these for any future offered. The symbol for the Russell
2000 Futures Contract, as we said, is going to just be RTY.
That is what we're going to type in to our asset finder on
any trading platform if we're searching for the Russell 2000 Futures Contract.
The contract size is going to be 50 dollars times the Russell 2000 Index.
The minimum tick will be .1 index points, and a tick
value will represent five dollars. Five dollars a tick.
The trading hours are going to be rather standard.
It's going to be Sunday to Friday to 6 p.m., with a break until 5 p.m.
Eastern time, with a halt at 4:15 to 4:30 p.m.
The contract will have five months in the quarterly cycle.
That's March, June, September, and December. The options available will be
quarterly with monthly, weekly, and Monday, Wednesday, and Friday
options as well. Termination of trading can occur up to 9:30 a.m.
Eastern time on the third Friday of the contract month.
While we're at it, let's keep it going and take a look at
the micro e-mini contract because, of course, we don't want
to discriminate based on size.
Ha Ha
The symbol for the micro e-mini is going to be the M2K.
M2K, just like we described, is how we're going to find this
on our asset finder. The contract size will be five dollars
times the Russell 2000 Index, which is 1/10th the size
of our previously discussed contract.
The minimum tick is going to be .1 index points, with
a tick value being only 50 cents.
The trading hours will be exactly the same as we already
discussed, with the contract months being March quarterly
cycles: March, June, September, and December. Our options contracts
will be March, June, September, and December, and also listed
for five consecutive quarters.
When deciding whether e-mini futures contracts or ETFs are the way to go,
there are definitely some clear advantages that the futures
variation has over the ETFs that I'd like to discuss.
The first one off the bat is going to be lower commissions.
With the futures notional value being close to
85,000 dollars, which is when we multiply the index
value by 50, the ETF on the other hand is only 170 dollars.
This means it requires close to 500 contracts just
to equal one RTY contract, which ultimately will result in higher
transaction costs. In some cases, ETF instruments also allow
for after-hours trading, but most of the time they're not
available 24/7. Even though futures contracts are not,
we have 22 hours a day that futures contracts are. Even
though the cash equity market is closed during a big part of the trading hours,
futures contracts are still known for their excellent liquidity.
Finally, we have lower management fees. Another advantage
is going to be the lower management fees, and that is the cost
associated with trading that we inevitably can't avoid, but
we can choose cheaper options. With the ETF,
for example, you can hold the instrument forever. The RTY
on the other hand, has a fixed quarterly expiration cycle,
which would be March, June, September, and December like we
saw in the previous slide.
Although maintaining your future position throughout the
year incurs some additional costs,
it is way lower when it's compared to the almost .2%
management fee of the ETF.
Due to the volatile nature of the small companies that make
up the Russell 2000 Index,
it has become a spread haven where traders favor spreads
to lower some of their risk. One of the scenarios that we
see traders doing is when small caps out perform large-cap
stocks. We then see traders going long on the e-mini Russell
2000, and short on the e-mini S&P 500 at the same time. Another
alternative option is when small caps are outperforming mid-cap stocks.
We then see longs on the e-mini Russell 2000, and shorts
on the e-mini S&P mid cap 400.
We have a large cap scenario where the large caps are out performing
the small cap stocks, leading to longs on the e-mini S&P 500,
but shorts on the e-mini Russell 2000. Finally, when
the mid caps are outperforming the small cap stocks,
we see traders go long on the e-mini S&P mid cap 400, but short
on the e-mini Russell 2000.
These are just various spread strategies that traders use
with an attempt to lower their risk. Obviously, individual
experience is going to vary, not to sound like an infomercial,
but of course folks, do your research.
In conclusion, the Russell 2000 Index is an index that is
made up of the smaller companies, which oftentimes can be
considered undervalued, leading to strong volatility and potential
gains for traders who are looking to take advantage of either
futures with the e-minis, or the e-micros recently added, or
the ETF options as well.
There's various tradable assets out there around the Russell 2000,
like we discussed, and it makes up a very liquid market
with severe profit potential for those that are able to master it.
In the meantime folks, thank you for joining me again
for another Survival Guide episode.
I appreciate it as always, good luck and happy trading.
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video. Cheers all of you, over and out.