US small-cap stocks as reflected by the Russell 2000® Index have experienced the bumpiest of what has been quite a bumpy ride for the US and global equity markets in 2020. After running a relatively flat +1.6% total return from the beginning of the year through February 19, the Index declined 40.3% from February 19 through March 23 and has now risen 12.3% from the March 23 recent low through April 6. And while the recent sharp ups and downs for the index in 2020 have occurred over a relatively short time period, they are consistent when viewed through a longer lens.
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
In this unpredictable environment, investment approaches that combine options with index-based strategies to provide a downside buffer while limiting upside have proven valuable to investors. These index-based strategies help capture the return potential of the underlying index while maintaining 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 structured notes or certain insurance products, these strategies can now be accessed through exchange traded funds. FTSE Russell has recently worked with Innovator ETFs to help them offer such an approach.
Rolf Agather – managing director of North America index research, FTSE Russell:
“Recent experience shows that US small-caps have historically been subject to more significant swings in performance than the broad market, and this is particularly true in market downturns when investors generally gravitate toward larger cap stocks and defensive-oriented sectors. 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 Capital Management, LLC:
“We have seen growing interest among investors in our new ETF based on a Russell 2000 Index-based options strategy that allows investors to remain invested in U.S. small-cap stocks with a built-in 15% buffer. This is particularly true given recent significant swings in the Index, in which the options can provide a shock absorber of sorts in exchange for a cap on potential upside.”
To help investors with information and insight to help navigate volatile markets during these challenging times, FTSE Russell has established a special landing page—Coronavirus: mapping the impact—on our website that includes relevant content on a number of topics.
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