US market volatility A historical perspective
ftserussell.com March 2020 FTSE Russell 1 FTSE Russell is not an investment firm and this presentation is not advice about any investment activity. None of the information in this presentation or reference to a FTSE Russell index constitutes an offer to buy or sell, or a promotion of a security. This presentation is solely for informational purposes. Accordingly, nothing contained in this presentation is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of making any investment through our indexes.
Views expressed are subject to change. These views do not necessarily reflect the opinion of FTSE Russell or London Stock Exchange Group plc.
FTSE Russell 2 Assets benchmarked to the Russell US Indexes ~ $8 trillion in assets benchmarked to Russell US Indexes • A long history of providing institutional investors with precise, predictable tools to build, manage and measure portfolios • Tracked by 65% of active US equity institutional funds* • 14 of the 15 most frequently used US institutional equity benchmarks*
1% Micro & Mega Cap Series
14% 18% 18% 49% Russell 3000® Russell 2000® Russell Midcap® Russell 1000® (Broad Cap) (Small Cap) (Large Cap)
Data as of December 31, 2018 as reported on April 1, 2019 by eVestment for institutional assets, Morningstar for retail mutual funds, insurance products, and ETFs, and additional passive assets directly collected by FTSE Russell. AUM data includes blended benchmarks and excludes futures and options. Passive assets directly collected by FTSE Russell have been removed from third party sources to prevent double counting. No assurances are given by FTSE Russell as to the accuracy of the data. Russell 1000 large cap series includes the Russell 1000 index; Russell Midcap series includes the Russell Midcap index and the Russell 2500 index; Russell 2000 Small Cap series includes the Russell 2000 index and the Russell Small Cap Completeness index; Russell 3000 Broad Cap series includes the Russell 3000 index and the Russell 3000E index; Russell Mega Cap series includes the Russell Top 200 index and the Russell Top 50 index. * eVestment, data as of December 31, 2018 as reported on April 1, 2019.
FTSE Russell 3 Summary of construction & methodology rules Russell US Indexes
Inclusions • Companies classified as US • Must trade on major US exchange on rank day in May Exclusions • Pink sheet, OTC and bulletin board stocks • Closed-end mutual funds, limited partnerships, royalty trusts • Blank check/SPAC companies, BDCs • Foreign Stocks and American Depositary Receipts (ADRs) • Companies under $30Million in total market capitalization • Companies historically passing UBTI to shareholders* • Stocks trading below $1.00 (average used for the month of May for existing members) • Stocks with 5% Floating market cap (or less) Maintenance • Stocks removed between reconstitution dates are NOT replaced • Spin-offs and Initial Public Offerings are the only additions between reconstitution dates
A complete set of rules can be found at http://www.ftse.com/products/downloads/Russell-US-indexes.pdf *and not blocking future UBTI to shareholders
FTSE Russell 4 Russell US Indexes Construction summary
1 2 3 4 Start with all US Remove ineligible Rank and capture top Create the Russell The Russell US Indexes equity securities securities 4,000 securities above 3000 for US $30M in market securities are completely capitalization recalibrated each year in Russell 3000E™ Russell 3000® Index Index June during Russell Reconstitution
This unbiased approach ~10,000+ ~6,000 4,000 securities 3,000 securities to capturing the US securities securities market, which defines the breaks between large, mid and small cap and determines where companies fall along the growth/value spectrum, is one of the most anticipated US market events each year
Note: If there are fewer than 4,000 eligible companies above $30M in size, the R3000E will contain fewer than 4,000 companies.
FTSE Russell 5 US capitalization rank comparison
2019 market cap range 2018 market cap range $974.2B Russell 1000® $926.9B Russell 1000® Index Index Microsoft Apple Inc. $974.2B $926.9B
$ wtd average $ wtd average $176.3B $198.3B
$5.0B* $5.0B* $3.7B $3.6B $2.5B* Russell 2000® $2.4B* Russell 2000® Index Index $ wtd average $ wtd average Russell $2.1B Russell $2.1B $159.2M Microcap® $152.3M Microcap® Index $30.0M Index $30.2M
* Reflects banding. Data as of May 11, 2018 and May 10, 2019 respectively.
FTSE Russell 6 Long-term Performance
128
64
32
16
8
4
2
Cumulative Performance (log (log scale) Performance Cumulative 1 Dec-1978 Dec-1980 Dec-1982 Dec-1984 Dec-1986 Dec-1988 Dec-1990 Dec-1992 Dec-1994 Dec-1996 Dec-1998 Dec-2000 Dec-2002 Dec-2004 Dec-2006 Dec-2008 Dec-2010 Dec-2012 Dec-2014 Dec-2016 Dec-2018 Russell 1000 Russell 2000
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
FTSE Russell 7 Recent small cap cycles are not as pronounced
Rolling 3- and 5-Year Excess Returns (Russell 2000 - Russell 1000)
20
15
10
5
0
-5
-10
-15 Annualized (%) Return Excess Annualized
-20 Dec-1981 Dec-1983 Dec-1985 Dec-1987 Dec-1989 Dec-1991 Dec-1993 Dec-1995 Dec-1997 Dec-1999 Dec-2001 Dec-2003 Dec-2005 Dec-2007 Dec-2009 Dec-2011 Dec-2013 Dec-2015 Dec-2017 Dec-2019 3-Year 5-Year
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
FTSE Russell 8 Daily small cap volatility higher now than historically
90
80
70
60
50
40 Volatlity 30
20
10
0 Dec-1978 Dec-1982 Dec-1986 Dec-1990 Dec-1994 Dec-1998 Dec-2002 Dec-2006 Dec-2010 Dec-2014 Dec-2018 R2000 trailing 30-day Vol Avg (1979-1998) Avg (1999-2019)
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
FTSE Russell 9 Implied volatility pre/post GFC
100 200% 90 180% 80 160% 70 140% RVX/ VIX 60 120% 50 100% 40 80%
Implied Volatility Implied 30 60% 20 40% 10 20% 0 0% Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 Dec-2017 Dec-2018 Dec-2019 VIX RVX RVX/VIX (RHS) Source: FTSE Russell, CBOE. Past performance is no guarantee of future results. Please see the end for important legal disclosures. Cboe®, Chicago Board Options Exchange®, Cboe Volatility Index®, and VIX® are registered trademarks of Chicago Board Options Exchange, Incorporated (Cboe). RVX is a service mark of Cboe. This data is believed to be correct but Cboe does not guarantee the accuracy of the data and will not be held liable for consequences of its use.
FTSE Russell 10 Small cap volatility consistently higher than large cap
Rolling Annualized 3-Year Volatility (Monthly Returns) 30 300%
25 250% R2000 VolR1000 Vol /
20 200%
15 150%
10 100% Annualized Annualized Std Dev
5 50%
0 0% Dec-1981 Dec-1983 Dec-1985 Dec-1987 Dec-1989 Dec-1991 Dec-1993 Dec-1995 Dec-1997 Dec-1999 Dec-2001 Dec-2003 Dec-2005 Dec-2007 Dec-2009 Dec-2011 Dec-2013 Dec-2015 Dec-2017 Dec-2019
Russell 1000 Russell 2000 R2000/R1000
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
FTSE Russell 11 US small cap currently more volatile than non-US small cap
Rolling Annualized 3-Year Volatility
45
40
35
30
25
20
15 Annualized Annualized Std Dev 10
5
0 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 Dec-2017 Dec-2018 Dec-2019 Russell 1000 Russell 2000 Int'l Smallcap Emg Mkt Smallcap
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
FTSE Russell 12 Historical P/E December 31, 1978 – December 31, 2019
50 100
45 90
40 80 Percent of index of Percent 35 70
30 60
25 50 PE Ratio 20 40
15 30
10 20
5 10
0 0 Dec-1978 Dec-1983 Dec-1988 Dec-1993 Dec-1998 Dec-2003 Dec-2008 Dec-2013 Dec-2018
Russell 1000 PE Russell 2000 PE % Russell 1000 neg. EPS (RHS) % Russell 2000 neg. EPS (RHS) Source: FTSE Russell
FTSE Russell 13 Portfolio characteristics as of December 31, 2019
Russell 2000 Russell 1000 Avg Market Capitalization ($billion) 2.5 226.2 Dividend Yield 1.4 1.8
Price/Earnings 38.7 24.3 Price/Earnings excluding negative EPS 20.5 22.2 P/E using FY1 Est 17.3 20.1
Price/Book 2.0 3.3 Price/Sales 1.1 2.3
Non-US Revenue % 28.1 44.4
Source: FTSE Russell, Factset
FTSE Russell 14 Russell 2000 historical sector weights December 31, 1978 – December 31, 2019
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Technology Health Care Consumer Discretionary Consumer Staples Energy Materials & Processing Producer Durables Financial Services Utilities
Source: FTSE Russell
FTSE Russell 15 Relative sector weights December 31, 2019
Financial Services
Producer Durables
Health Care
Materials & Processing
Energy
Utilities
Consumer Discretionary
Consumer Staples
Technology
-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0
Weight (%)
Russell 1000 Russell 2000 Difference
Source: FTSE Russell
FTSE Russell 16 Key conclusions
The “small cap premium” has The large/small volatility 1 not been realized over the 2 relationship has been fairly last 40 years. constant over time.
Daily volatility is higher since US Small cap is currently 3 the TMT bubble, but we are 4 more volatile than both currently in a low volatility Developed and Emerging Int’l regime as measured by lower markets. frequency data.
US Small cap is currently 5 undervalued relative to US Large cap.
FTSE Russell 17 Important information
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FTSE Russell 18 About FTSE Russell
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