The Cboe Russell 2000 Volatility Index (RVX) is a measure of expected volatility in the Russell 2000 Index over the next 30 days. Some may refer to it as the “Small-Cap VIX,” given it reflects anticipated fluctuations in the market by analysing options on the Russell 2000—a widely used benchmark for US small-cap stocks.
The RVX offers insight into investor sentiment, specifically within small-cap stocks, which are often more sensitive to economic cycles, periods of significant volatility, and shifts in market risk. During times of financial stress or economic turbulence, the RVX tends to rise, similar to the VIX, indicating heightened volatility expectations within the small-cap sector. Conversely, the index typically falls during periods of market stability.
The RVX was launched by the Chicago Board Options Exchange (Cboe) as a tool for investors to better understand volatility within small cap stocks. Like other volatility indices, the RVX itself is not directly investable but an instrument that is traded.
RVX Forecast
Analysts expect the RVX to remain elevated as small-cap companies face potential economic headwinds, and key news events provide uncertainty between November and the end of the year. Royce Investment Partners said in a recent report that they found that “small-cap’s batting average—that is, the percentage of periods in which the Russell 2000 had higher average annualized 3-year returns than the Russell 1000—was at its highest following periods of heightened volatility.”
The firm added that small caps generally provide strong three-year returns after heightened volatility and that the three-year returns following highly volatile markets have led large caps. “In light of the larger-than-usual amount of uncertainty in the markets and economy today, we would not be surprised to see more volatility through the remainder of 2024,” they stated.
On the other hand, analysts at BlackRock note that as a result of more cyclical sector exposure, “the Russell 2000 has lagged the S&P 500, especially during periods of market volatility and increased uncertainty.”
Assessing the cumulative return of both the S&P 500 and the Russell 2000 since 2014, BlackRock notes that the S&P 500 has outperformed the Russell 2000 by a substantial margin over the period, noting that the market environment has been characterised by persistent macro uncertainty. As a result, increased volatility to the end of this year, as expected by Royce Investment Partners, may see subdued returns for the Russell 2000.
Our View: The RVX is a good indicator for understanding the sentiment and risk appetite within the small-cap market. As shown with the investment research from the firms above, monitoring the Russell 2000 volatility can provide insights into how small-cap stocks may perform over a certain period or during economic downturns. Given the outlook for continued volatility, investors may want to adjust their exposure to small-cap assets.
RVX Levels & Historical Trends
Average: “On average, the RVX Index has been 24.19%” – Cboe.
High: 88.79
Low: 11.83
Small-cap volatility often peaks during economic recessions and periods of financial crisis.
How the RVX Works
The Cboe Russell 2000 Volatility Index (RVX) calculates the expected volatility of the Russell 2000 Index over the next 30 days, using a methodology similar to the VIX. To determine this, the RVX uses mid-quote values from two sets of Russell 2000 Index options that are set to expire shortly before and shortly after the 30-day mark.
By combining these two option sets, the index captures the anticipated fluctuations in the Russell 2000 during this period. The result is then annualised, square-rooted, and expressed as a percentage, providing a clearer view of short-term volatility expectations within the small-cap market.
Other Volatility Indexes
Who Uses the RVX
The RVX serves as a tool for a variety of investors:
Portfolio Managers: Use the RVX to hedge against market volatility specific to small-cap stocks or IWM positions.
Institutional Traders: Gauge small-cap sentiment and assess risk within this asset class.
Long-term Investors: Monitor the RVX to adjust portfolio allocations in response to small-cap volatility trends.
Market Analysts: Track the RVX as a way to understand broader risk sentiment across market capitalisations.
