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Risk and Opportunity on the Horizon for US Small Cap Investors

FTSE Russell

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While the 2020 picture looks promising for US small-cap equities, according to market experts at FTSE Russell and Cboe, a number of risks still lurk on the horizon for investors.

Alec Young, managing director, global markets research, FTSE Russell:

“After a 25% Russell 2000 Index total return last year, there’s room for optimism although reasons for near-term caution have also recently emerged. On a positive note, the domestic economic picture is expected to be strong, led by a resilient consumer, accommodative financial conditions and an uptick in global leading indicators, all of which would bode well for small caps—an economically sensitive asset class that tends to do best when growth is picking up. That said, volatility is a normal part of investing and often stems from macro risks that are inherently hard to predict like the sudden coronavirus outbreak or the outcome of November’s presidential and congressional elections. In addition, 2019’s strong performance has left Russell 2000 valuations at a historically elevated level of 25X 12-month forward consensus EPS, (vs. a 10-year average of 22X) leaving investors with less margin for error if high 2020 earnings growth expectations fail to materialize. As such, we are excited to work with Cboe to allow them to bring investors Russell 2000 risk management tools.”

Rick Rosenthal, director, business development, Cboe:

“Over the past year, U.S. small-caps as measured by the Russell 2000 Index lagged behind their large-caps counterparts in the Russell 1000, which could potentially signal opportunity for investors as we move into 2020. The divergence between the two indexes is approximately 95 points above the average spread. And with a +4% move thus far in February, the Russell 2000 may be reflecting global market fears around the coronavirus coupled with low interest rates and continuing economic growth as indicated by housing and manufacturing.”

Finding ways to harvest volatility and manage market risk is a key to successful long-term investing. Cboe has introduced a new paper with Wilshire Associates that studies the long-term performance across a number of market cycles for benchmarks designed to represent the long-term performance of proposed hypothetical options strategies. 

Originally Posted on February 21, 2020 – Risk and Opportunity on the Horizon for US Small Cap Investors

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