FTSE Russell Insights

Small-cap stocks poised to benefit from Fed’s easing cycle

Catherine Yoshimoto

Director, Product Management, Benchmark Product Development
  • Fed Rate Cuts and Funding: Reduced rates improve borrowing options for small-cap companies, potentially enhancing growth and innovation.
  • Russell 2000 Performance: The Russell 2000 Index rose over 9% in three months, outpacing large caps amid anticipation of rate cuts.
  • Local Economic Impact: Increased funding allows small-cap companies to hire more employees and contribute positively to their communities.

A boost for small caps: Better access to funding and beyond

The Fed’s first cut—and the assumption of more to come—is a boost for small-cap stocks. Compared to larger companies, small-cap businesses tend to have more floating-rate loans vs. fixed-rate debt. As such, many small-cap firms will see their existing loan payments shrink as interest rates decline. Rate cuts bring better access to funding for smaller firms along with the potential for several other constructive outcomes, including:

  • An innovation surge – Lower interest rates make borrowing cheaper, encouraging small-cap companies to invest in research and development, leading to significant growth opportunities.
  • Local economic impact – Increased funding access allows small caps to hire more employees and contribute to their communities.
  • Diverse investment opportunities – As small caps thrive, they attract more investor interest, offering growth potential and portfolio diversification.
  • Alternative financing – Fed rate cuts can stimulate alternative funding models like crowdfunding, empowering local entrepreneurs and democratizing access to capital.

Easing conditions fuel investor support for Russell 2000 Index

Leading up to the Fed’s September decision, market moves reflected optimism about the pace of forthcoming rate cuts. In July, for example, the Russell 2000 Index jumped more than 11% in just five trading sessions as the Fed Funds futures market priced in additional cuts.

Over the three-month period ended September 30, the small-cap benchmark rose more than 9%, outpacing its large-cap counterpart, the Russell 1000 Index, which gained just 6%.

Some investors turn to Russell 2000 Index derivatives

Futures contracts have grown in popularity as a potentially liquid, capital efficient, and transparent solution for investors seeking Russell 2000 Index exposure. For example, CME Group’s E-mini Russell 2000 Index futures (RTY) average daily trading volume has risen more than four-fold since 2017—offering growing liquidity to index futures investors. Ahead of the Fed announcement, volume reached 724,762 contracts on September 16, the third highest volume day of the year.

E-mini Russell-2000 Futures 2024 Daily Trading Volume

chart displays the CME Group’s E-mini Russell 2000 Index futures (RTY) average daily trading volume has risen more than four-fold since 2017—offering growing liquidity to index futures investors. Ahead of the Fed announcement, volume reached 724,762 contracts on September 16, the third highest volume day of the year.

Source: CME Group. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

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) reached $16.4 billion in the 3rd quarter of 2024, up 58% when compared to the same period in 2023.

russell 2000 index options (RUT) average daily spot notional value

chart displays the , the estimated notional value of average daily volume for cash-settled Russell 2000 Index options (RUT) reached $16.4 billion in the 3rd quarter of 2024, up 58% when compared to the same period in 2023.

Source: Cboe Global Markets. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

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.

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