SYS-CON MEDIA Authors: Elizabeth White, Sean Houghton, Glenn Rossman, Ignacio M. Llorente, Xenia von Wedel

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Small Cap Volatility: "Small Cap Premium," or Ratio of Implied Volatility Between U.S. Small Cap and U.S. Large Cap Stocks Back Above 60% on July 11, and Nearing Its 2014 High, According to the CBOE Russell 2000 Volatility Index and CBOE Volatility Index

SEATTLE, WA -- (Marketwired) -- 07/16/14 -- The small cap "premium," or implied volatility for the small cap U.S. equity market as reflected by closing prices for the CBOE Russell 2000 Volatility Index (SM)(RVX(SM)) relative to implied volatility for the large cap U.S. equity market as measured by the CBOE Volatility Index® (VIX®), has exceeded 50% since July 2, significantly higher than the year-to-date average, and closed at 62.9% on Friday, July 11, its highest point since June 10.

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At the same time, investor usage of options based on the Russell 2000® Index (RUT), as measured by average daily volume increase, has grown in 2014 relative to investor usage of options based on the S&P 500 Index (SPX). RUT options average daily volume was up 14% through June 30 relative to full year 2013, while average daily volume in S&P 500 Index-based options (SPX) was up 0.7% through June 30 relative to full year 2013. Russell 2000 Index-based futures (TF) average daily volume has increased 18% through June 30 relative to full year 2013, while average daily volume of S&P 500 Index-based futures (ES) has declined (-0.7%) through June 30 relative to full year 2013 (Source: Options Clearing Corporation, ICE, CME).

Small cap volatility has historically tended to be higher than large cap volatility. This "premium" averaged 28% over 2013 and was at just over a 38% average in 2014 to-date as of July 11. However, for April and May 2014 the premium averaged 50%, with an average RVX level of 20.00 and VIX level of 13.34. The premium hit a year-to-date high of 63% on June 10 (more than double the 2013 full year average).

"In the last week, increased overall market volatility, as measured by RVX(SM) and VIX(SM), and U.S. large cap market outperformance, as measured by the Russell 1000® Index, understandably led to increased interest in U.S. small cap equity options by traders and investors," said Russell Rhoads, CFA and instructor with The Options Institute at the Chicago Board Options Exchange. "So far this year as of July 11, the U.S. small cap Russell 2000 Index has underperformed the U.S. large cap Russell 1000® Index and RVX has been elevated to reflect investor's increased risk perception for small cap stocks."

"The fluctuation in the small cap premium we have witnessed this year as of July 11 through the relative performance of RVX & VIX helps illustrate that relative volatility levels for the U.S. large cap and small cap equity markets do not always move in lockstep," said Patrick Fay, director of index derivatives for Russell Investments. "This underscores the importance of considering small cap volatility measures rather than following a one-size-fits-all approach. Similar to 1984 when investors first welcomed the Russell 2000 Index to measure U.S. small cap equity market performance, investors and traders now welcome the CBOE Russell 2000 Volatility Index to measure U.S. small cap equity market implied volatility."

For more information on the CBOE Russell 2000 Volatility Index, go to the Russell Indexes website or CBOE Russell 2000 Volatility Index microsite.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Please note: Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Russell's publication of the Indexes or Index constituents in no way suggests or implies a representation or opinion by Russell as to the attractiveness of investing in a particular security. Inclusion of a security in an Index is not a promotion, sponsorship or endorsement of a security by Russell and Russell makes no representation, warranty or guarantee with respect to the performance of any security included in a Russell Index.

Opinions expressed by Mr. Fay and Mr. Rhoads reflect market performance as of July 11, 2014 and are subject to change at any time based on market or other conditions without notice. Past performance does not guarantee future performance.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Copyright © Russell Investments 2014. All rights reserved.

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

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