FTSE Russell Insights

For some, the Russell recon is an occasion for derivatives

Catherine Yoshimoto

director, product management
  • Russell Index options have seen significant growth in size and liquidity, providing investors with the potential to manage market volatility and harvest it during the recon period when volatility is generally muted.
  • Despite assumptions of potential price volatility during the Russell recon, the process is well-orchestrated, allowing traders to get ahead of recon day and resulting in minimal market impact.
  • Futures contracts, like E-mini Russell 2000 Index Futures, offer liquidity and efficiency for investors seeking Russell US Index exposure, minimizing tracking error during the Russell recon process.

For some, the Russell recon is an occasion for derivatives

Our annual Russell reconstitution is invariably an eventful time of year. With $12 trillion in assets benchmarked to or invested in products tracking our Russell US Indexes, many market participants closely track our timeline from rank day to recon day and develop trading strategies to get ahead of index additions and deletions. But for some investors, Russell recon trading strategy isn’t just about index constituent trading—it can also be an occasion to consider Russell US Index derivatives.

Futures have the potential to minimize tracking error and operational burden

Futures contracts have grown in popularity as a potentially liquid, capital efficient, and transparent solution for investors seeking Russell US Index exposure. For example, CME Group’s E-mini Russell 2000 Index Futures (RTY) average daily trading volume has risen more than five-fold since 2017—offering growing liquidity to index futures investors. And Micro E-mini Russell 2000 Index futures—a smaller-sized version launched in 2019 as an answer to rising retail demand—have also seen growing trading volumes.

E-mini Russell 2000 Futures ADV and Average Open Interest

Source CME Group, as of June 30, 2023. Data based on the FTSE UK Index Universe for September 2022. Past performance is no guarantee of future results. Please see the end for important disclosures.

As Russell 2000 Index futures liquidity has increased, they’ve emerged as a potentially cost-efficient tool for investors looking to minimize portfolio tracking error relative to the index during the Russell recon. Instead of risking higher tracking error when executing trades across 2000 or more index constituent stocks, some investors migrate cash basket positions to RTY ahead of the recon. This ensures the portfolio mirrors the index as it reconstitutes—and avoids both the operational heavy lifting of transacting in the underlying Russell 2000 Index constituents and the potential associated tracking error.

Options for potentially harvesting muted Russell recon volatility

Growing use of Russell Index derivatives hasn’t been limited to futures—we’ve also observed that the Russell Index options ecosystem has grown both with respect to size and liquidity. For example, the estimated notional value of average daily volume for cash-settled Russell 2000 Index options (RUT) surged to $10.6 billion, up 33% from the 4th quarter of 2020 to the 1st quarter of 2023. 

Many investors find options have the potential to be an effective tool for managing market volatility, where they can use them to either express a view on volatility or to harvest it. When it comes to considering options strategies around the Russell recon, it’s important to note that volatility has typically been muted throughout the recon process. As shown, since 2009 the Cboe Russell 2000 Volatility Index (RVX)—which represents a market estimate of expected 30-day future volatility of the Russell 2000 Index—has been below its historical average in the recon timeline months of April, May, and June.

Cboe Russell 2000 Volatility Index (RVX) 30-Day Expected Volatility (Sept. 2009 - Apr. 2023)

Source Bloomberg & Cboe Global Markets. Data based on the FTSE UK Index Universe for September 2022. Past performance is no guarantee of future results

Given the muted volatility around the Russell recon, some investors view it as an opportunity for options strategies designed to harvest volatility.

A well-orchestrated process makes for muted volatility

As recon day typically concludes as one of the highest trading volume days of the year on equity exchanges, it’s often assumed that the process will give rise to Russell Index constituent price volatility. However, we can observe the opposite has generally occurred, where volatility remains muted from rank day to recon day. This is a testament to the design of our process, where our timeline allows traders to get ahead of recon day—resulting in minimal market impact.

Some investors turn to Russell Index derivatives during our recon process, but please note FTSE Russell does not distribute futures or options products. These products are listed for trading on exchanges. Please contact the exchange or your broker for more information and check out our recent webinar for more details on the Russell recon and derivative strategies.

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