By: Catherine Yoshimoto, Sr. Index Product Manager
The first six months of 2016 was a wild ride that left market participants looking for any means to steady themselves as the world shook around them. In times like this, I find myself thinking of the song “Steady, As She Goes” by the Raconteurs. The lyrics, “No matter what you do you’ll always feel as though you tripped and fell," sum up how I feel after yet another volatile day in the markets. This got me thinking about the types of indexes that may help to understand markets in more turbulent times and led me to take a closer look at the Russell Defensive Indexes®, which are part of the Russell Stability Index® Series.
The Russell Defensive Indexes are constructed to include companies that have relatively stable business conditions and are less sensitive to economic cycles, credit cycles and market volatility based on their stability indicators. I wanted to analyze the relative performance of the Russell Defensive Indexes compared with that of their broader market counterparts over the last six months. What do these indexes tell us about the stability of their constituents?
Year-to-date risk/return of Defensive indexes compared with broader market indexes
As we can see in the chart above, during the first six months of 2016, the Russell 3000 Defensive Index recorded a return of 7%, nearly twice that of the Russell 3000® Index with a lower standard deviation. In fact, across all cap tiers, the Russell Defensive Indexes outperformed their broader market counterparts with less volatility. Most notably, we can see that the Russell Midcap Defensive Index had the highest index return among all cap segments with the lowest standard deviation. This begs the question: What information does the index provide about midcap companies that can be used by market participants analyzing the market?
The answer may lie in the combination of attributes that midcap companies provide. These middle tier companies often blend the benefits associated with both large cap and small cap stocks. They may benefit from the ability to operate more autonomously from shareholder pressure than larger cap companies and also from shifting from small cap to large cap indexes with larger levels of assets. This segment of the market may also offer additional diversification benefits by providing exposure to companies with both large and small cap characteristics.
Looking back at performance over longer time periods, the same trend seems to hold true. As we can see in the chart below, the Russell Defensive Indexes recorded higher returns than their respective market cap weighted indexes over the one, three and five-year time periods. And again, the Russell Midcap Defensive Index maintained its higher returns.
As we continue to navigate a market full of uncertainty heading into the upcoming US presidential election, market participants may find indexes across all cap tiers, such as the Russell Defensive Indexes, useful tools in informing their decisions.
Please follow the FTSE Russell Blog for more on how to navigate these turbulent times.
 See D. Koenig (2015), “The Russell Midcap® Style Indexes: Potential opportunities in the middle,” Russell Index Insights (February).
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