Buyside Strategies EQD Research Volatility
Apr 9, 2020
By Russell Rhoads, head of research
The first quarter of 2020 was a tough time for U.S. stocks with the worst quarterly returns since the fourth quarter of 2008. However, the paths of three widely-followed equity indices varied greatly. When the dust settled, the NASDAQ-100 (NDX) was down 10.53% while the Standard & Poor’s 500 (SPX) lost 20% and the Russell 2000 (RUT) was lower by 30.89%.
NDX, SPX, and RUT First Quarter 2020 Performance Indexed to 100
Data Source: Yahoo Finance
The maximum drawdown for each index varied as well in the first quarter. RUT was down just over 40% at the worst point in the quarter. SPX was down just over 30% and NDX down a little less than 20% at their lowest points. Also of interest is that each of these three broad-based indices put in their respective lows on different days.
NDX, SPX, and RUT First Quarter 2020 Statistics
It is no secret that there is wide deviation in the composition of each of these indices that goes beyond the Russell 2000 focusing on smaller stocks versus the NASDAQ-100 and S&P 500. This variety can be broken down by the eleven sectors appearing on the next table. The weighting of each sector at the beginning of the quarter demonstrates some glaring differences across the indices.
NDX, SPX, and RUT Sector Weightings 12/31/2019
Data Sources: State Street, Invesco, iShares
NDX only has exposure to eight of the eleven sectors with no stocks falling in the energy, materials, or real estate sectors. Also, NDX is often thought of as a technology benchmark, but about one-third of the composition of NDX falls outside technology. Somewhat surprising is that consumer discretionary is a bigger part of the index than health care.
The Russell 2000 is more diversified than the other two indexes with no more than 20% focused on a specific industry. Before running the numbers, RUT having the highest weighting in health care is counter to the dramatic underperformance of RUT compared to the other two indexes. Finally, the S&P 500, like the Nasdaq-100, is heavily weighted toward technology with about 33% in the communication services and information technology sectors.
Below is a table that ranks sector performance and ranks the weighting of each sector for each index at the beginning of the quarter.
Sector Performance and NDX, RUT, and SPX Sector Weightings
Data Sources: Yahoo Finance, State Street, Invesco, iShares
The Nasdaq-100 benefitted from where it has exposure, but also from avoiding the sectors that under performed during the quarter. Real estate, materials, and energy do not contribute to the NDX and all three are not at the top of the first quarter sector performance list. The underperformance of the Russell 2000 can be attributed to underperformance of the Industrial and financial sectors which rank high in the breakdown of RUT exposure. Also, two of the top five sectors, consumer staples and communication services, are the two lowest-weighted sectors for the Russell 2000.
Expectations, as measured by volatility indexes, showed some similarities across the three indexes, but also had a bit of divergence as well. The respective volatility indexes ran up together, but their peak levels varied a bit. Also, when compared to the highest levels that each achieved in 2008 only VIX closed higher than the previous record. Both VXN and RVX ran to higher levels, but fell short of a record close. VIX moving to higher levels than VXN is not a typical as the long term average for VXN is just over 2.5 points higher than VIX.
VXN, VIX, and RVX First Quarter 2020 Statistics (*LT Avg 2004 – Q1 2020)
Data Source: Cboe Global Markets
The various measures of stock performance in the U.S. all shared a very difficult first quarter. However, their paths varied as well as the timing of their lowest points, and volatility expectation associated with the dramatic price changes during the quarter. The old saying is that all ships rise and fall together, however these three indices took varied paths as they all sunk in the first quarter.