According to global index provider FTSE Russell, the US small-cap Russell 2000 Index has returned 6.6% annually over the past 20 years on a price basis as of September 30 as compared to a 4.6% annual price return for the US large-cap Russell 1000 Index for the same period.
And while US small cap returns look relatively good for investors in hindsight over the past two decades, these returns have come with much higher relative volatility. The Russell 2000 had a 19.5% annualized standard deviation over the last 20 years as compared to 14.8% for the Russell 1000 and the Russell 2000 had a maximum drawdown of 54%.
To help address this natural volatility that market indexes experience over time, index-based options strategies have gained traction in recent years. These index-based strategies help capture the return potential of the underlying index while ensuring capital preservation over time for the end investor. Index-based options strategies use a basket of index options to create a downside buffer with an upside performance cap. Once available only through structures notes or certain insurance products, these strategies can now be accessed through exchange traded funds.
Martin Howard, senior research analyst, FTSE Russell:
“Option overlays are an established type of strategy that can provide a means of mitigating against adverse market index movement. For an additional expense they can be added to a market index to offset certain market exposures.”
Graham Day, vice president of product & research, Innovator ETFs
“Innovator ETFs wanted to develop an ETF that matched the one year price return of the Russell 2000 Index with a cap while limiting downside losses. The new ETF based on a Russell 2000 Index-based options strategy allows investors to remain invested in U.S. small-cap stocks with a built-in 15% buffer."
Innovator ETFs recently introduced an addition to its Defined Outcome ETFS™ based on the Russell 2000 Price Index.
For more information about the Russell US Indexes, please visit the FTSE Russell website.
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