In a small cap-led US equity market where the Russell 2000 Index has risen 9.6% relative to a 5.2% rise for the US large cap Russell 1000 Index as of June 11, the year-to-date volatility differential between small and large cap US stocks is at an all-time low, according to new research from Cboe Global Markets (Cboe®) and FTSE Russell.
A recent study by Cboe has found that the “small cap premium,” or the difference between perceived US small cap volatility and US large cap volatility as reflected by average daily closing prices of the Cboe Russell 2000 Volatility Index (RVXSM) and the Cboe Volatility Index® (VIX® Index), is at the lowest point since it was first measured in 2004.
Russell Rhoads, CFA, director, product advancement, Cboe global markets
“The ‘small cap premium’ can be an effective way to measure investors’ perceptions of the volatility of US large cap stocks relative to US small cap stocks. On average, small caps are historically more volatile than large caps, but this relative measure has been known to ebb and flow from year-to-year since we began measuring this important statistic in 2004. At 10.3% year-to-date, we are seeing a huge outlier for the ‘small cap premium’ and certainly a reflection of the market conditions we have seen so far this year.”
Alec Young – managing director, global markets research, FTSE Russell
“With many of 2018’s equity headwinds being international in nature, the Russell 2000 Index has outperformed the Russell 1000 Index due in large part to small caps’ lower international sales exposure. Being more domestic has insulated small caps from trade tensions, geopolitical worries and the earnings drag stemming from a stronger dollar. Being less global also gives small caps more exposure to several positives within the US, including tax reform, increasing deregulation and faster economic growth relative to weaker recoveries in Europe and Japan. All these tailwinds are helping drive faster profit growth for small cap companies relative to their blue chip counterparts, helping fuel YTD leadership while tempering relative volatility for this asset class.”
FTSE Russell will complete the annual reconstitution of the Russell US Indexes, which includes the annual rebalance of the US small cap Russell 2000 Index, after the close of the US equity markets on Friday, June 22. You can learn more about Russell Reconstitution on the FTSE Russell website.
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