While everyone is familiar with the S&P 500, the Russell 2000 is often a shadowy presence for investors – wrongly so, because the barometer was introduced back in 1984 as the primary indicator for the small cap segment. Since then the Russell 2000 has become the most frequently-used benchmark for US second-line stocks. The companies it includes, which between them account for more than 90% of the market capitalisation of all small caps abroad, are weighted by their free float. Quarterly adjustments ensure that the Russell 2000 is always up to date. The index is also spread widely across a number of sectors, with no one sector particularly dominant. Companies from industry, healthcare and finance occupy the top three spots, accounting for shares of between 16% and 18% each.
Over many years the S&P 500 has performed much better than the Russell 2000. Taking a five-year view, for instance, the blue chips have appreciated by 83%, putting them 40 percentage points ahead of small caps (see chart). Investors can take advantage of the recently dwindling difference – in July the small caps outperformed by 10 percentage points – with the new long/short certificate on the two indices. The strategy behind the structured product seeks to buy shares in the Russell 2000 (long) while at the same time selling the S&P 500 (short). The certificate is consequently based on the assumption that the spread between the two equity barometers will continue to widen. The long/short instrument thus gives private investors a relatively easy way of pursuing a professional strategy. Speculation on such divergences is the order of the day for institutional investors.
The certificate comes with a participation rate of 100%. Whether the investment ultimately pays off depends on how the two equity benchmarks perform. The long/short strategy index starts at 100%. At the end of the two-year term, the value of the index is determined as a function of the movement of the two underlyings. The performance of the short position, i.e. the S&P 500, is deducted from the progression of the long position, the Russell 2000. The repayment, measured as a percentage of the nominal (USD 1,000), corresponds to the difference between the amount of the final strategy level and the strike at 100%. To give an example, should the Russell 2000 rise by 10% and the S&P 500 fall by 10%, the final strategy level would be 120% [10% - (-10%) = 20%]. In this case there would be a respectable gain of 20%.
There is no risk of loss for investors who hold the certificate until the end of the two-year term. Even if, contrary to expectation, the difference between the two indices widens in favour of the S&P 500, the investment will still not slip into the red. As issuer, Leonteq guarantees to repay the full nominal of USD 1,000 on maturity.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.