Russell on the Move
The Russell 2000 index was developed by the Frank Russell Co. and is designed to track the performance of a set group of companies similar to the S&P 500 index. Unlike the S&P 500 that tracks the largest 500 companies in the U.S., the Russell 2000 is a much broader index, measuring performance of the smallest 2,000 companies inside of the Russell 3,000 index, which then logically tracks the largest 3,000 companies domestically.
The Russell 2000, of course, is considered a small-cap index, measuring small-cap stocks in two categories — growth and value. The average market capitalization in the index is about $1 billion, compared with an average market cap in the S&P 500 index of roughly $20 billion.
Russell reconstitutes its indexes annually unlike some others index providers, which often can mean a more accurate, timely depiction of the market. Interestingly, thanks to annual reconstitution, Microsoft and Starbucks were added to the Russell 1000 seven years before they were included in the S&P 500.
Though the Russell has been around for quite some time, it only recently burst onto center stage in the futures arena. One reason for this sudden prominence was a sparkling performance during 2003. During that year, the index was up more than 47%. Compare that with gains of just less than 30% in the S&P 500 — still substantial, but not up to the Russell's level. Subsequent periods, though they cannot match 2003, still are impressive — in 2004, the Russell posted gains of 18%, and thus far in 2005, there's been a four-percent increase. When compared against S&P returns of nine% in 2004 and just more than one% so far in 2005, the Russell stands atop the heap.
With the reputation as one of the best-performing major indexes has come volume from institutions, hedge funds, individual investors, and most recently, trading systems. A new survey measuring market share of various stock index families showed Russell's family of U.S. indexes hold an industry-leading 52-percent share of the institutional market for benchmarks. The survey also found 49.5% of the $3.8 trillion in assets represented in the survey now are benchmarked to Russell indexes and, in terms of institutional usage Russell indexes represent nine of the top ten. The small-cap Russell 2000 Index continues to rank as the second-most commonly used equity benchmark in the U.S.
Will Russell Be King?
Will the Russell take the place of the S&P as the index futures market? Though it has made tremendous strides and currently brings traders opportunities they cannot find elsewhere, the chance of overtaking the S&P is fairly remote. Or, at least, don't count on it happening any time soon. The full-sized Russell contract averages just more than 2,200 contracts changing hands daily, and S&P E-mini volume still dwarfs the Russell E-mini volume, at nearly 830,000 contracts per day versus approximately 120,000. Yet growth in the Russell has been nothing short of spectacular, showing that traders are moving away from dwindling opportunities in the S&P into the expanding ones in the E-mini Russell.
For traders inclined to use trading systems, E-mini Russell-based trading systems may be one way to gain exposure to that market. Trading systems can be as simple as suggesting a buy at tomorrow's open while risking only three points, or as complex as a neural net using artificial intelligence to gauge market sentiment. Their real value, however, may lie in their ability to make an investor's trading decisions consistent.
Take some time to study the Russell futures products in the current market environment. Steadily increased trading volume bolsters the liquidity situation so traders can get in and out of the market with ease. Clearly, too, their effective range is something that gives them a leg up on other indexes that might previously have been a more popular choice.