CME Group’s E-mini Russell 2000 index futures contracts recently experienced their second-highest daily trading volume of the year, fueled by preparations for the upcoming annual Russell Reconstitution and June expiry.
Each year, FTSE Russell reviews the Russell 1000, 2000, and 3000 indices to reflect market developments over the past year, ensuring they accurately represent the US equity market. This year’s reconstitution will finalize after the US equity markets close on June 28.
The reconstitution typically marks one of the busiest days in cash equities trading. However, Paul Woolman, global head of equity index products at CME, noted a growing trend among investors to utilize futures for managing market and operational risks, as well as positioning themselves amidst stock additions and deletions.
Woolman emphasized the importance of correct rebalancing to avoid portfolio tracking errors, highlighting futures as ideal tools for precise index tracking.
Leading up to the June expiry, CME’s E-mini Russell 2000 index futures saw robust activity, trading 625,000 contracts on June 17, the second-highest volume day this year after March 11’s record of 700,000 contracts.
Year-to-date, average daily volume for E-mini Russell 2000 futures stands at 218,000 contracts, with daily volumes nearing 353,000 contracts during June’s expiry week, marking a significant increase.
To manage trading and operational risks ahead of the reconstitution, market participants can utilize strategies such as the Basis Trade at Index Close (BTIC) and Exchange for Physical (EFP) functionalities. EFPs enable flexible transactions between futures contracts and underlying physical equities, such as ETFs or baskets of shares, without minimum size requirements.
BTIC allows participants to trade futures at fixed spreads relative to the underlying index level at the US equity market’s close. Year-to-date, BTIC volumes for Russell 2000 futures have risen by 9%, with a notable spike to 13,600 contracts on June 21 during the roll.
In terms of index changes, large-cap growth stocks have dominated, as reflected in the performance of the Russell 1000 Growth Index compared to its value counterpart. Technology companies, including Super Micro Computer and MicroStrategy, are prominent among the 38 new additions to the Russell 1000, highlighting continued sector strength.
FTSE Russell’s Catherine Yoshimoto noted over 200 new additions to the Russell 2000, with nearly 100 from the healthcare sector. She highlighted investor concerns about concentration and lack of diversity amidst significant market capitalization increases among select technology firms.
FTSE Russell has responded by launching capped indexes to limit concentration risk, providing investors with alternatives to the standard index performance.
Yoshimoto observed a potential shift towards value stocks and small caps amid investor interest in diversification, indicating a broader market sentiment change going forward.
“As we navigate this market landscape, clients are increasingly exploring capped index options, such as the Russell 1000 excluding the top 10, to assess performance against traditional benchmarks,” Yoshimoto concluded.
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