NY-Russell 2000: Small-caps may be worth overseeing after all

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05/20/2014 | 04:59 pm
The Russell 2000, a barely known index, was created in 1984 by the Frank Russell Company and is composed of small-cap stocks (a.k.a companies with less than $2 billion) constituting the American equity market. It regroups the 2000 bottom shares of its big brother, the Russell 3000 Index. In spite of its broad coverage, the compartment corresponds to less than 10% of the aggregate capitalization of the U.S. stock market.
Nowadays, the indicator holds the title of the most important benchmark for mutual funds, as it represents a scheme much more adapted to firms with little market capitalizations. In fact, a wide range of portfolio managers, most of them based in America and United Kingdom, usually create Exchange-Traded Funds (ETFs) in a teamed effort to replicate its performance or if possible do better than it.  

One of its main advantages is that due to its constituents, the index withdraws exogeneity generated by random effects and speculative movements, which are mostly suffered by multinationals or market leading companies, as they are often the main target of the gutter press. Therefore, equities contained in Russell 2000 also seem to be a better measure of market trends’ implications in the midterm and the long run for wide variations are shown when reversals occur.

Sectors represented in the listing (a subset of the Russell 3000), include the following principal segments: Financial Services, Consumer Discretionary, Producer Durables, Technology and Health Care. Details are offered on Exhibit 1.

Exhibit 1    Source: Russell Investments  

Since 2008, the year where the Global Financial Crisis (GFC) detonated, its components lifts prices toward higher levels, allowing the index to recently reach a record at 1181.3 points. This enhancement was mainly helped by a remarkable recovery on financial stocks, as they benefited from government driven stimulus and special aid platforms in the past. Its high quotations beat S&P500 (the principal gauge for American equities) for the period between 2008 and 2010, as well as the Nasdaq and the Dow Jones Industrial Average. 

Until January 2014, the small-cap indicator remained in what we can call the second step of its recovery path, started early by November 2012. This uptrend suffered an important backlash of almost 8% in only two weeks, for throwing prices toward 1093.6 points, on November 2013.

Americas keep pushing stocks, this time at laggard paces. Nevertheless, the Russell 2000 remains in a strengthened upward movement. Some back offs have been set since March and even if April is called to water markets with springs, no major changes were seen. Although upbeat earnings were released by the end of the first quarter from heavyweights companies, they have not been able to stop further corrections and evinced the weakened power of main market movers and their handicap to preserve the previous rhythm of growth of principal leading indexes.

As technical patterns attest, the index proved its inability to consistently beat the market as the 100-day moving average was broken in January, thus leaving its previous trading range. However, it managed to gear this drop into an immediate revival, the push being not enough to assure the continuity of its previous performance or rather the soaring prices.

The iShares Russell 2000 ETF (NYSE: IWM) is an example of exchange-traded funds on US stocks that tracks the Russell 2000 index. Issued by BlackRock, it’s principally aimed at investors alike to get access to the whole small-cap segment of American markets.

As small-caps are often said to measure investors’ risk aversion and as bearish trend are shown in the iShares Russell 2000 ETF, this may be part of an increase in hedging strategies conceived by mutual funds that attempt to turn out against further losses as corrections in equity markets seems to be set. After the 119.3 peak registered in March 7, the ETF slumps systematically for a current total loss of 10%, as trades are at 107.7. This decline could be perceived by most of people as no major concern, but as small-cap stocks becomes more and more a leading  indicator for market trends, investors should follow closely its evolution.
Rosanna Santana
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