The Russell 2000 index

April 15, 2023 by Nithisha CHALLA

The Russell 2000 index

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the Russell 2000 index and details its characteristics.

The Russell 2000 index

As we can already notice in the name, Russell 2000 Index is a stock market index that tracks the performance of 2,000 small-cap companies in the United States. It was introduced by the Russell Investment Group in 1984 and is now created, managed, and distributed by FTSE Russell, a subsidiary of the London Stock Exchange Group. The Russell Index family has three indexes in it, Russell 1000, Russell 2000 and the Russell 3000.

The Russell 2000 has historically outperformed the larger-cap S&P 500 Index over the long term. According to data from FTSE Russell, the Russell 2000 has returned an average of 10.7% annually over the past 20 years, compared to an average return of 7.5% for the S&P 500 over the same period.

The Russell 2000 is widely used as a benchmark by active fund managers who specialize in small-cap stocks. As of March 2023, the largest sector in the Russell 2000 was healthcare, followed by technology and financials. The index is market-capitalization weighted, which means that larger companies have a greater impact on the index performance. The index is also used as the basis for exchange-traded funds (ETFs) and other financial products that allow investors to gain exposure to small-cap stocks.

FTSE Russell is known for its commitment to transparency and the accuracy of its index calculations. The company uses a rules-based methodology for selecting and weighting stocks in its indices, and it provides detailed documentation on its methodology and data sources to ensure that investors can make informed decisions about using its indices for benchmarking and investment purposes.

How is the Russell 2000 index represented in trading platforms and financial websites? The ticker symbol used in the financial industry for the Russell 2000 index is “RUT”.

Table 1 below gives the Top 10 stocks in the Russell 2000 index in terms of market capitalization as of January 31, 2023.

Table 1. Top 10 stocks in the Russell 2000 index.

Source: computation by the author (data: YahooFinance! financial website).

Table 2 gives the sector representation of the Russell 2000 index in terms of number of stocks and market capitalization as of January 31, 2023.

Table 2. Sector representation in the Russell 2000 index.

Source: computation by the author (data: YahooFinance! financial website).

Calculation of the Russell 2000 index value

The value of the Russell 2000 Index is calculated using a formula that takes into account the market capitalization of the individual stocks that are included in the index. This means the larger companies have a greater impact on the index than the smaller companies.

The Russell 2000 is reconstituted annually, typically in June. During this process, the index is updated to include the most recent data on small-cap stocks, and companies are added or removed from the index based on their market capitalization.

The formula for a market capitalization-weighted index is given by

Market Capitalization Index value

where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, N^k the number of issued shares for asset k, and t the time of calculation of the index.

In a market capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Market Capitalization Weighted Index Weight

which clearly shows that the weight of each asset in the index is its market capitalization of the asset divided by the sum of the market capitalizations of all assets.

Note that the divisor, whose calculation is based on the number of shares, is typically adjusted for events such as stock splits and dividends. The divisor is used to ensure that the value of the index remains consistent over time despite changes in the number of outstanding shares.

Use of the Russell 2000 index in asset management

The Russell 2000 index is widely used in asset management as a benchmark for small-cap stocks in the United States. Small-cap stock experts who run active funds frequently use the Russell 2000 as a benchmark for their performance. On the other hand, passive fund managers can create index funds or exchange-traded funds (ETFs) that follow the performance of the Russell 2000 using the Russell 2000 as a base. In addition to serving as a benchmark for active and passive fund managers, the Russell 2000 index is also used by individual investors who are interested in small-cap stocks. Overall, the Russell 2000 index is a valuable tool for asset managers, and it has a significant impact on the investment strategies and decisions made in this market segment.

Benchmark for equity funds

Equity funds are actively managed investment vehicles that pool capital from a number of investors to buy stocks from a variety of industries. The Russell 2000 index serves as a benchmark for fund managers when assessing the performance of their small-cap equity funds. Fund managers might use a variety of investment strategies, such as top-down sector allocation or bottom-up stock selection, to outperform the benchmark.

Investors can get a good idea of how well a small-cap equity fund is doing in relation to the overall market by comparing the fund’s performance to that of the Russell 2000 index. However, it’s crucial to keep in mind that there are additional elements, such as fees, expenses, and the expertise and experience of the fund manager, that can impact the performance of an equity fund.

Financial products around the Russell 2000 index

There are a number of financial products that either provide exposure to the index or use information from the index. Not just the index funds but there are numerous ETFs and other financial products such as mutual funds, futures and options etc.

Exchange-Traded Funds, Options Contracts, Futures Contracts, Index funds and Mutual funds.
ETFs are the investment funds that are traded like stocks. ETFs based on the Russell 2000 Index include the iShares Russell 2000 ETF and the Vanguard Russell 2000 ETF.
Index mutual funds that track the performance of the Russell 2000 Index typically have low expense ratios and are designed to provide returns that closely match the performance of the index.
Futures and options contracts based on the Russell 2000 Index are traded on several exchanges, including the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).

Historical data for the Russell 2000 index

How to get the data?

The Russell 2000 index is the most common index used in finance, and historical data for the Russell 2000 index can be easily downloaded from the internet.

For example, you can download data for the Russell 2000 index from September 10, 1987 on Yahoo! Finance (the Yahoo! code for Russell 2000 index is ^RUT).

Source: Yahoo! Finance.

You can also download the same data from a Bloomberg terminal.

R program

The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the Russell 2000 index.

Data file

The R program that you can download above allows you to download the data for the Russell 2000 index from the Yahoo! Finance website. The database starts on September 10, 1987. It also computes the returns (logarithmic returns) from closing prices.

Table 3 below represents the top of the data file for the Russell 2000 index downloaded from the Yahoo! Finance website with the R program.

Table 3. Top of the data file for the Russell 2000 index.
Top of the file for the Russell 2000 index data
Source: computation by the author (data: Yahoo! Finance website).

Evolution of the Russell 2000 index

Figure 1 below gives the evolution of the Russell 2000 index from September 10, 1987 to December 30, 2022 on a daily basis.

Figure 1. Evolution of the Russell 2000 index.

Source: computation by the author (data: Yahoo! Finance website).

Figure 2 below gives the evolution of the Russell 2000 index returns from September 10, 1987 to December 30, 2022 on a daily basis.

Figure 2. Evolution of the Russell 2000 index returns.

Source: computation by the author (data: Yahoo! Finance website).

Summary statistics for the Russell 2000 index

The R program that you can download above also allows you to compute summary statistics about the returns of the Russell 2000 index.

Table 4 below presents the following summary statistics estimated for the Russell 2000 index:

The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.

The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.

Table 4. Summary statistics for the Russell 2000 index.

Source: computation by the author (data: Yahoo! Finance website).

Statistical distribution of the Russell 2000 index returns

Historical distribution

Figure 3 represents the historical distribution of the Russell 2000 index daily returns for the period from September 10, 1987 to December 30, 2022.

Figure 3. Historical distribution of the Russell 2000 index returns.

Source: computation by the author (data: Yahoo! Finance website).

Gaussian distribution

The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from September 10, 1987 to December 30, 2022. The mean of daily returns is equal to 0.02% and the standard deviation of daily returns is equal to 1.20% (or equivalently 5.88% for the annual mean and 19.38% for the annual standard deviation as shown in Table 3 above).

Figure 4 below represents the Gaussian distribution of the Russell 2000 index daily returns with parameters estimated over the period from September 10, 1987 to December 30, 2022.

Figure 4. Gaussian distribution of the Russell 2000 index returns.
Gaussian distribution of the daily Russell 2000 index returns
Source: computation by the author (data: Yahoo! Finance website).

Risk measures of the Russell 2000 index returns

The R program that you can download above also allows you to compute risk measures about the returns of the Russell 2000 index.

Table 5 below presents the following risk measures estimated for the Russell 2000 index:

The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)

Table 5. Risk measures for the Russell 2000 index.

Source: computation by the author (data: Yahoo! Finance website).

The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the Russell 2000index while the study of the right tail is relevant for an investor holding a short position in the Russell 2000 index.

Why should I be interested in this post?

For a number of reasons, management students (as future managers and individual investors) should learn about the Russell 2000 index. The performance of 2000 small-cap American companies is tracked by this stock market index, which is first and foremost well-known and respected. Gaining a deeper understanding of the US small-cap stock market and the businesses that fuel its expansion requires knowledge of the Russell 2000 index. Individual investors can assess the performance of their own investments and those of their organization by comprehending the Russell 2000 index and its components. Last but not least, a lot of businesses base their mutual funds and exchange-traded funds (ETFs) on the Russell 2000 index which can considered as interesting assets to diversify a portfolio.

Useful resources

Wikipedia Russell indexes

Finance Strategists Defining Russell 2000 Index

FTSE Russell The Russell 2000 Index: Small cap index of choice

Motley Fool 10 of the largest Russell 2000 companies

Academic research about risk

Longin F. (2000) From VaR to stress testing: the extreme value approach Journal of Banking and Finance, N°24, pp 1097-1130.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Data

Yahoo! Finance

Yahoo! Finance Data for the Russell 2000 index

About the author

The article was written in April 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

The Consumer Confidence Index

April 14, 2023 by Jianen HUANG

The Consumer Confidence Index

In this article, Jianen HUANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2023) explains about the consumer confidence index.

What is CCI

The Consumer Confidence Index, or CCI, is a widely used economic indicator that measures the level of optimism or pessimism that consumers feel about the economy. It is a metric that is usually used by governments, businesses, and investors to gauge consumer sentiment and predict future economic activity. The CCI is an important tool for economists and policymakers because consumer spending accounts for a significant portion of economic activity in most countries. When consumers feel more confident about the economy, they are more likely to spend money, which results in boosting economic growth. Conversely, when consumers are feeling uncertain or pessimistic about the future, they are more likely to save their money, which can lead to a slowdown in economic activity.

The index is based on a survey of consumers, which includes questions about their current financial situation, their expectations for the future, and their spending intentions. And the Index is calculated by averaging the responses of a survey of consumers. Based on these responses, a composite index is created that reflects the level of consumer confidence. A high index reading suggests that consumers are optimistic about the economy, while a low index reading suggests that consumers are pessimistic.

The figure below shows the US Consumer Confidence Index on a yearly basis. In the figure, there is a significant decrease in CCI in 2020, and that is strongly due to the impact of the COVID-19 pandemic, and at the beginning of 2022, there is another decrease that is because of the Ukraine-Russian war. The Consumer Confidence Index is based on the confidence level of consumers in the economy, and disruptions like these can significantly influence the confidence of consumers, which will lead to a fall in the financial market.

Consumer Confidence Index in the US.

Source: The Conference Board.

Regional Differences

There are several different versions of the Consumer Confidence Index used around the world, and each of them has its own methodology and survey questions.

In the United States, the index is produced by the Conference Board, a nonprofit research organization. The survey used to calculate the index asks consumers about their feelings on business conditions, employment, and income. The index is then calculated based on the percentage of consumers who feel positive about these factors.

In China, the CCI is released monthly by the National Bureau of Statistics. It is based on a survey of urban households, and the index is calculated based on four components: consumers’ assessments of current economic conditions, their expectations for future economic conditions, their confidence in the job market, and their willingness to spend money.

In the European Union, the Consumer Confidence Index is calculated by the European Commission. The survey used to calculate the index asks consumers about their expectations for the economy, their personal finances, and their intentions to make major purchases. The index is then calculated based on the percentage of consumers who feel positive about these factors.

Limitations of CCI

Despite its importance, the Consumer Confidence Index has some limitations that we need to take into account. First, the index is based on a survey of consumers, which means that it may not accurately reflect the true state of the economy. Consumers may be overly optimistic or pessimistic based on factors that are not related to the economy, such as current events or personal experiences. Additionally, the index only measures consumer sentiment, which may not always translate into actual economic activity. Consumers may feel optimistic about the economy, and still choose to save their money instead of spending it.

Another limitation of the Consumer Confidence Index is that it may not be a good indicator of the economic outlook for all segments of the population. The index is based on a survey of consumers as a whole, which means that it may not accurately reflect the experiences of specific demographic groups. For example, consumers who are experiencing financial difficulties may have a more pessimistic outlook on the economy than consumers who are financially secure.

Conclusion

In conclusion, the Consumer Confidence Index is an important economic indicator that measures the level of optimism or pessimism that consumers feel about the economy. While the index has some limitations, it remains a useful tool for predicting future economic activity and understanding the sentiments of consumers. By keeping an eye on the Consumer Confidence Index, stakeholders can gain a better understanding of the economic climate and make informed decisions about the future.

Useful resources

National Bureau of Statistics China Consumer Confidence Index

The Conference Board US Consumer Confidence Index

European Union EU Consumer Confidence Index

About the author

The article was written in April 2023 by Jianen HUANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2023).

Good-til-Cancelled (GTC) order and Immediate-or-Cancel (IOC) order

February 16, 2025April 14, 2023 by Lokendra RATHORE

Good-til-Cancelled (GTC) order and Immediate-or-Cancel (IOC) order

In this article, Lokendra RATHORE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023) explains the Good-til-Cancelled (GTC) order and the Immediate-or-Cancel (IOC) used to trade in financial markets.

In addition to the types of orders that we discussed in Period1 of the SimTrade certificate (market orders, limit orders, best limit orders, stop loss orders and stop limit orders), I would like to elaborate on the following two other types or order that I have used in the past and found useful: Good-til-Cancelled (GTC) Order and Immediate-or-Cancel (IOC) Order.

What is Good-til-Cancelled (GTC) Order?

A Good-till-Cancelled (GTC) order is an order that remains in effect until it is either executed or cancelled by the investor. This type of order allows the investor to place a standing order that remains active until the investor cancels it or it is filled. For example, if an investor wants to purchase a stock when it reaches a certain price, they can place a GTC order, and the order will remain active until either the price is reached or the investor cancels it.

Significance

Flexibility: GTC orders provide investors with a high level of flexibility, as they remain active for an indefinite period of time. This allows investors to take advantage of market opportunities without having to send order every day.

Long-term Investment Strategy: GTC orders are particularly useful for investors who have a long-term investment strategy and are looking to accumulate shares over a period of time. The investor can place a GTC order at a specific price, and the order will remain active until the desired price is reached.

What is Immediate-or-Cancel (IOC) Order?

An Immediate-or-Cancel (IOC) order is a type of order that must be executed immediately, and any portion of the order that cannot be filled is cancelled. This type of order is used when an investor wants to ensure that an order is executed as quickly as possible, even if only part of the order can be filled. For example, if an investor wants to purchase a large number of shares of a stock, they may place an IOC order. If only a portion of the shares can be purchased immediately, the remainder of the order will be cancelled.

Significance

Time-sensitive: IOC orders are suitable for investors who need to execute a trade quickly, such as when they need to close a position or take advantage of a sudden market opportunity.

Partial Fills: The IOC order allows for partial fills, meaning that if only a portion of the order can be executed immediately, the remainder of the order is cancelled. This can be useful when an investor wants to limit their exposure to a particular stock.

What is the difference between Good-til-Cancelled (GTC) Order and Day order

Table 1. Comparison of GTC and IOC orders.

Source: production by the author.

In conclusion, both GTC and IOC orders are useful tools for investors who want to manage their trades and execute their investment strategies effectively. The choice of which type of order to use will depend on the specific needs and investment objectives of the investor.

Useful resources

SimTrade course Trade orders

U.S. Securities and Exchange Commission (SEC) investor.gov

Investor.gov (SEC) Good-til-cancelled order

Investor.gov (SEC) Understanding Order Types

About the author

The article was written in April 2023 by Lokendra RATHORE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).

The NASDAQ index

April 10, 2023 by Nithisha CHALLA

The NASDAQ index

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the NASDAQ index and details its characteristics.

The NASDAQ index

NASDAQ was first founded in 1971 and it is an American stock exchange. By market capitalization of shares traded it is the second-largest stock exchange in the world after the New York Stock Exchange (NYSE). As many of the technology and growth companies are listed on the exchange it is a popular benchmark for them. It has around 3000 companies listed on it, including some of the world’s top technology companies like Microsoft, Amazon, Facebook and Google.

The NASDAQ index is a market capitalization-weighted index that tracks the performance of the stocks listed on the NASDAQ exchange. It is widely used by investors and financial analysts to gauge the performance of the technology sector and the broader US economy.

Interestingly, there is a sister index, the Nasdaq Financial 100 that consists only of financial stocks. Both indices debuted together in 1985. The Nasdaq Financial 100 index was given more attention in the early years. However, the Nasdaq-100 has gained popularity over time due to the expansion of tech companies.

How is the NASDAQ index represented in trading platforms and financial websites? The ticker symbol used in the financial industry for the NASDAQ index is “NDAQ”.

Table 1 gives the Top 10 stocks in the NASDAQ index in terms of market capitalization as of August 26, 2022.

Table 1. Top 10 stocks in the NASDAQ index.

Source: computation by the author (data: NASDAQ! financial website).

Table 2 gives the sector representation of the NASDAQ index in terms of number of stocks and market capitalization as of January 31, 2023.

Table 2. Sector representation in the NASDAQ index.

Source: computation by the author (data: ETmoney!).

Calculation of the NASDAQ index value

The NASDAQ index is a value-weighted index (also called a market-capitalization- weighted index). This means the larger companies have a greater impact on the index than the smaller companies.

At the end of each trading day the value of the NASDAQ index is determined in real-time and can be used as a benchmark for the performance of the index’s constituent companies’ current market prices.

The formula for a market-capitalization-weighted index is given by

Market Capitalization Index value

Where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, N^k the number of issued shares for asset k, and t the time of calculation of the index.

In a market capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Market Capitalization Weighted Index Weight

which clearly shows that the weight of each asset in the index is its market capitalization of the asset divided by the sum of the market capitalizations of all assets.

Use of the NASDAQ index in asset management

Given that the index is used for performance measuring it is widely used for constructing and analyzing investment portfolios. This index’s primary use is to create investment strategies, mitigate risk, and assess portfolio performance. Investors and asset managers utilize this index as a useful index to measure the overall performance of the market. It is mainly used for benchmarking, passive investing, active management and risk management.