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Index IDEA: US small cap equity volatility index hits multi-year low

The November 8 US presidential election ignited a sharp increase in US small cap stock market performance and volatility. The US small cap Russell 2000® Index rose 14.2% between election day and year-end relative to a 5.6% return for the US large cap Russell 1000® Index for the same time period. And the CBOE Russell 2000® Volatility Indexsm, which measures perceived volatility levels of US small cap stocks, reached an elevated closing high of 22.1 on November 8 and was at 19.4 on December 30, an indication that investors perceived the US small cap market as risky going into 2017.

In 2017, US small cap stock index performance relative to large caps has cooled, with the Russell 2000 Index declining 0.5% as of March 21 as compared to a 5% return for the Russell 1000 Index for the same time period.

Yet this decline in US small cap performance has been accompanied by a steady decline in the CBOE Russell 2000 Volatility Index. The leading US small cap equity market volatility index has declined steadily in 2017, reaching a multi-year low of 14.1 on March 17 and came back to 17.8 on March 21.

Russell Rhoads, director of education, CBOE Options Institute, said:

“The year-to-date performance of the RUT and RVX indexes is telling us an interesting story. On the one hand, after a strong post-election run, US small caps have taken quite a breather in 2017 and US large caps have outperformed. On the other hand, the US small cap volatility index showing the perceived risk for US small cap stocks at a multi-year low could indicate the beginning of a rotation back into small caps. These measures bear close watching in a US equity market driven by sentiment and headlines.”

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