While some market watchers have historically perceived Russell index reconstitution, held each year in June, as a more volatile time for US small cap stocks, new research from the CBOE paints a much different picture.
US small cap equity market implied volatility, as measured by the CBOE Russell 2000 Volatility Index (RVX), has been historically lower during the month of June, when global index provider FTSE Russell holds its annual Russell US indexes reconstitution and the membership of the Russell 2000 Index is recast for the coming year.
According to the CBOE, the average index price level for RVX in the month of June from 2004-2015 is 24.27, placing it ninth out of twelve in terms of implied small cap volatility relative to other months. Second, the historical relationship between RVX and the CBOE Volatility Index (VIX), used to measure the perceived volatility of US small caps stocks relative to US large cap stocks is actually lowest in June relative to other months of the year.
Russell Rhoads, Director of Education, CBOE Options Institute:
“From watching the reconstitution process in previous years I am aware that, contrary to what many market commentators may believe, the average implied volatility for US small caps as measured by RVX levels in June was below the monthly average for most months. However, I was surprised to see the small cap premium, or perceived volatility for US small caps relative to us large caps, as measured by the RVX / VIX price relationship, at its lowest average point during the month of June.”
Market participants are focused on the Russell indexes this week, as FTSE Russell prepares for its annual Russell US indexes reconstitution. At reconstitution, the entire Russell family of global indexes, including the Russell 1000 Index and Russell 2000 Index, are rebalanced to ensure that the indexes continue to accurately reflect the market.
As part of reconstitution, which concludes at US market close on Friday June 24th, composition, ranges and breakpoints between US large and small-cap stocks will be adjusted to reflect the current market environment.
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