Primer on Russell 2000 index

What is a small-cap stock?

A small-cap stock typically has a market capitalization of about $250 million to $2 billion. These companies are attractive investment opportunities for investors as they have the potential for higher growth compared to larger companies. However, due to the size and early stages of growth, investors have to be prepared for higher financial risks, greater volatility and less liquidity.

How to invest in/trade the Russell 2000 index?

Investors can have exposure to the the Russell 2000 Index through various financial instruments, each with its own advantages and disadvantages. Here are some common ways to invest in the Russell 2000 Index:

1. Exchange-Traded Funds (ETFs): The iShares Russell 2000 ETF (IWM) is a popular ETF for investors seeking broad exposure to small-cap stocks.

Advantages:

• Liquidity: Highly liquid, traded on stock exchange, easy to buy and sell.
• Diversification:  Provides exposure to all 2,000 companies across different sectors in the index.
• Convenience: Simple and efficient way to have an exposure to the small-caps.

Things to consider:

• Expense ratio: 19%. For IWM, an expense ratio of 0.19% means that for every $1,000 invested, approximately $1.90 per year is deducted to cover the fund's expenses. While the expense ratio for IWM is relatively low compared to mutual funds, it is still a cost that can eat into returns over time.
• Regular Trading hours: 09:30 – 16:00 Eastern Daylight Time (EDT)

2. Futures: E-mini Russell 2000 Futures (RTY) is a fraction of the size of the standard Russell 2000 Futures contract, more accessible for individual traders and investors. It offers exposure to small-caps using leverage for both hedging and speculative strategies.

Advantages:

• Liquidity: Highly liquid with active trading during market hours.
• Leverage: Can be traded on margin, enabling you to leverage a small margin deposit for much greater market exposure. 
• Hedging: Can be used to hedge against other investments.

Things to consider:

• Complexity: Requires understanding of futures markets and margin requirements.
• Risk: Leverage can amplify both gains and losses.
• Contract Size: Very high at 50 times the index value
• Live market data: Need to subscribe to the exchange data for a fee
• Regular Trading hours: 17:00 – 16:00 Central Daylight Time (CDT)

3. Micro Futures: E-mini Russell 2000 Futures (M2K) is a smaller contract size of the RTY. Smaller contract size makes it even more accessible for individual traders and investors. 

Advantages:

• Liquidity: May have slightly lower liquidity compared to RTY but generally still liquid.
• Leverage: Lower leverage allows for more effective risk management.
• Contract size: 5 times the Index value
• Margin requirement: Lower margin requirement compared to RTY.

Things to consider:

• Complexity: Similar to RTY, requires understanding of futures markets and margin requirements.
• Risk: Using leverage still can amplify both gains and losses, although less than RTY.
• Live market data: Need to subscribe to the exchange data for a fee
• Regular Trading hours: 17:00 – 16:00 Central Daylight Time (CDT)

4. Contracts for Difference (CFDs): US 2000 provide traders with a way to speculate on the price movements of the Russell 2000 Index.

Advantages:

• Leverage: Allows for significant leverage, meaning traders can control a large position with a relatively small amount of capital.
• Contract size: You can trade from a starting trade ticket size of as low as 1 index
• No commission and live market data: Unlike futures, trading CFDs involve no commissions and clients can also access live market data of the index in CFD without incurring extra fees.

Things to consider:

• Complexity: Trading CFDs can be complex as it requires a good understanding of market dynamics and risk management. Most suitable for experienced investors.
• Risk: While higher leverage can amplify gains, it can also amplify losses, potentially leading to significant financial risk.
• Fees: May include spreads, and overnight financing costs.
• Regular Trading hours: 20:01 – 16:00 Central Daylight Time (CDT)

5. Cash Options: Russell 2000 Index Listed Options (RUT) allow investors and traders to express their views on the index through buying and selling of options.

Advantages:

• Flexibility: Can be used for various strategies, including hedging, speculation and income generation.
• Leverage: Options provide leverage, allowing traders to control a bigger position with a small amount of capital.
• Cash Settlement: Settled in cash, no need to deliver the underlying asset.

Things to consider:

• Complexity: Trading Options can be complex as it requires a good understanding of options strategies and pricing.
• Risk: High potential for loss, especially with leveraged positions. While buyers have limited risk, sellers (writers) of options can face significant losses if the market moves against their position.
• Contract size: 1 lot of options = 100 times the index
• Regular Trading hours: 08:30 – 15:15 Central Daylight Time (CDT)

6. Futures Options: E-mini Russell 2000 Futures Options (RTO) are derivatives based on the E-mini Russell 2000 Futures contract.

Advantages:

• Flexibility: Can be used for various strategies, including hedging, speculation and income generation.
• Leverage: Allows for control of a large position with a smaller capital.
• Hedging: Can be used to hedge futures positions.
• Contract size: 1 option contract tracks 1 underlying futures contract which is 50 times the index

Things to consider:

• Complexity: Can be very complex as trading futures option requires a good understanding of both futures and options strategies.
• Risk: High potential for loss, as with higher potential for gains.
• Settlement style: Physical delivering of the underlying futures
• Expiry dates: Only quarter-end expiries
• Regular Trading hours: 17:00 – 16:00 Central Daylight Time (CDT)

7.  ETF Options: The iShares Russell 2000 ETF Options (IWM) are derivatives based on IWM ETF.

Advantages:

• Flexibility: Can be used for various strategies, including hedging, speculation and income generation.
• Leverage: Provides leverage, allowing control for a larger position of IWM with a smaller capital.
• Liquidity: IWM options tend to have good liquidity.
• Contract size: 1 option lot = 100 units of the ETF

Things to consider:

• Complexity: Trading Options can be complex as it requires a good understanding of options strategies and pricing.
• Risk: High potential for loss, especially with leveraged positions. While buyers have limited risk, sellers (writers) of options can face significant losses if the market moves against their position.
• Settlement style: Physical delivery of the underlying ETF
• Regular Trading hours: 09:30 – 16:00 Eastern Daylight Time (EDT)

Summary

Overall, depending on their investment strategies, risk appetite and level of expertise, investors and traders can choose a wide array of instruments to invest in the Russell 2000 index to have an exposure to the small-cap stocks.

• ETFs: most ideal for investors due to the simplicity, liquidity and diversification.
• Futures: suitable for traders looking for leverage and for experienced investors for hedging.
• Micro Futures: suitable for traders seeking futures exposure with smaller ticket sizes.
• CFDs: suitable for traders seeking futures exposure with very small ticket sizes.
• Cash Options: Suitable for traders with a good understanding of options, looking for flexibility and leverage to express their views on the index
• Futures Options: Suitable for traders with a good understanding of options who prefer to trade options with longer trading hours than cash options
• ETF Options : offer flexibility and leverage with generally better liquidity compared to the futures options.

The products or the information stated above such as contract size and trading hours etc. are only intended for educational purposes. Please always refer to the trading conditions displayed on the contract in the trading platform as well as the trade ticket to see specifications for each contract before trading. We recommend that before you invest, you inform yourself well about the operation and risks. In Saxo Capital Markets Risk Warning, you will find more information on leveraged products and the associated risks. Trading in financial instruments carries risk and may not be suitable for you. Please refer to Saxo Capital Markets’ full Disclaimer here.