January 9th, 2013

Focusing on the Russell 2000 Index

imageAmong the investments in my My Model Portfolio, there’s one Index ETF: the 3x leveraged Russell 2000 ETF.  What has intrigued me over the past several weeks about this ETF is that it continues chugging along, moving higher with no little recognition of the difficulties the S&P 500 is having in matching its all-time high water mark of 1576, let alone being able to cross above the more immediate 1465 resistance hurdle.

While the S&P 500 just barely nudged above its Tech Bubble high with an 85% rise from the 2003 low to the peak just before the Financial Crisis/Great Recession bear market crash in 2007-2009, the Russell 2000 was able to appreciate around 145% over the same period.  Likewise, the S&P 500 Index rose around 114% from the bottom of the Financial Crisis Crash in 2009 to the 2012 high while the Russell 2000 appreciated around 135% to yesterday’s close (click on image to enlarge).

Russell 2000-S&P 500

As they say, past performance isn’t a guarantee of future performance.  But a comparison of the two indexes since 1991 reveals that there’s something more going on here than external economic and financial cycles.  And I believe the answer rests in the stocks comprising both indexes.

Most importantly, the stock with the largest capitalization in the Russell 2000 currently is Ocwen Financial Corp., a savings and loan coming in at $4710.0 million.  The stock at the bottom of the list of 2000 stocks with the smallest capitalization is Ventrus Biosciences Corp weighing in at just $31.0 million.  By comparison, the S&P stock with a capitalization of around $4700.0 is Robert Half Inc.  Not insignificantly, RHI ranks 438th out of 500; in other words, 87.4% of the stocks comprising the S&P 500 Index (or 437 stocks) are larger than even the largest of the Russell 2000 stock.  Not one stock in the Russell 2000 is large enough to be ranked above any of the bottom 62 of 500 stocks in the S&P 500.

To avoid significant liability resulting from a mad rush on a limited supply of stock, Cramer and the rest of the Talking Heads you hear in the business media of necessity might push “best of bread”, large-caps, performance over the past years including the secular bear market suggests a better strategy if you’re looking for some capital appreciation … albeit with more volatility.  Now that we may be at the cusp of some significant upside market action when the debt ceiling “crisis” passes, the place to look for stocks with significant upside potential is among those in the Russell 2000 Index.

Alternatively, if you just want to add some juice to your less risky, mid- to large-cap collection of individual stocks, include a small amount of IWM, the Russell 2000 ETF or UWM or URTY the 2x and 3x leveraged equivalents.  There are also a wide variety of slices of these 2000 stocks if you want to zero in on only the value, growth and mid-cap or small-cap components of the Index.  In sum, variants of the Russell 2000 could be an easy way to capitalize and maximize on any underlying market action.