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The Russell 2000 Index Insights Into the US Small Cap Market

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The Russell 2000 Index Insights Into the US Small Cap Market The Russell 2000 Index Insights into the US small cap market Rolf Agather Managing Director, North America Research ftserussell.com September 2019 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 assets* • 9 of the 10 US equity indexes most used by institutional investors* 1% Other 13% 17% 18% 50% 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; Other includes the Russell Top 200 index and the Russell Top 50 index. 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 Historical performance Periods ending June 30, 2019 20.0 15.0 10.0 5.0 Rate of Return (%) of Return Rate 0.0 -5.0 YTD 1 Year 3 Year 5 Year 10 Year 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 Calendar Year performance 50.0 40.0 30.0 20.0 10.0 Rate of Return (%) of Return Rate 0.0 -10.0 -20.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 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 8 Long Term performance 128.0 64.0 32.0 16.0 8.0 4.0 Cumulative Performance (log scale) 2.0 1.0 Dec-1978 Dec-1983 Dec-1988 Dec-1993 Dec-1998 Dec-2003 Dec-2008 Dec-2013 Dec-2018 Russell 1000 Russell 2000 Source: FTSE Russell as of December 31, 2018. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 9 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 Annualized Annualized Excess Return (%) -10 -15 -20 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 3-Year 5-Year Source: FTSE Russell as of December 31, 2018. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 10 Small cap volatility higher since the Tech bubble 100.0 90.0 80.0 70.0 60.0 50.0 Volatlity 40.0 30.0 20.0 10.0 0.0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 30-day R2000 Trailing Vol RVX Source: FTSE Russell, CBOE as of August 29, 2019. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 11 Volatility has trended down slightly since GFC 100.0 200% 90.0 180% 80.0 160% 70.0 140% 60.0 120% RVX/VIX 50.0 100% Implied Volatility 40.0 80% 30.0 60% 20.0 40% 10.0 20% 0.0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 RVX VIX RVX/VIX (RHS) Source: FTSE Russell, CBOE as of August 29, 2019. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 12 Index Characteristics As of June 30, 2019 Russell 2000 Russell 1000 Avg Market Capitalization ($billion) 2.6 222.5 Dividend Yield 1.4 1.9 Price/Earnings 33.4 21.5 Price/Earnings excluding negative EPS 19.3 20.0 P/E using FY1 Est 16.2 17.1 Historical 5 Yr EPS Growth 11.1 12.5 1 Year EPS Forecast Growth 5.5 6.9 Price/Book 2.3 3.3 Price/Sales 1.6 2.3 ROE 8.4 21.9 Non-US Revenue % 18.2 36.7 Source: FTSE Russell, FactSet. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 13 Historical P/E December 31, 1978 – December 31, 2018 50.0 100.0 45.0 90.0 40.0 80.0 35.0 70.0 30.0 60.0 of index Percent 25.0 50.0 PE Ratio 20.0 40.0 15.0 30.0 10.0 20.0 5.0 10.0 0.0 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. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 14 Russell 2000 Historical Sector Weights December 31, 1978 – December 31, 2018 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Technology Health Care Consumer Discretionary Consumer Staples Energy Materials & Processing Producer Durables Financial Services Utilities Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 15 Russell 2000 Sectors: Return/Risk 10 Years Ending December 31, 2018 20 Technology 15 Consumer Discretionary Health Care Consumer Staples Utilities Materials & Processing 10 Financial Services Producer Durables 5 Annualized (%) Return Annualized 0 -5 Energy -10 10 15 20 25 30 35 40 Annualized Standard Deviation Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures. FTSE Russell 16 Historical Sector Returns (relative to R1000) December 31, 1978 – December 31, 2018 4 2 1 0.5 (log scale) 0.25 0.125 Excess Excess Cumulative Return R2000/Russell 1000 0.0625 Dec-1978 Dec-1983 Dec-1988 Dec-1993 Dec-1998 Dec-2003 Dec-2008 Dec-2013 Dec-2018 Technology Health Care Consumer Discretionary Consumer Staples Energy Materials & Processing Producer Durables Financial Services Utilities Source: FTSE Russell.
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