Can index choice lead to new opportunities in Europe?

Prior to 2012 there was a gap in investable products covering the European small-cap, midcap, and SMID-cap market segments. Anecdotally, hedges against these segments were often created with products based upon liquid large cap indexes. Given the mega-cap focus of such indexes, considerable tracking error and attendant costs tend to accompany these hedges.

This white paper looks at how the Russell Europe SMID 300 Index has relatively high correlations and low tracking error against the key mid-cap and small-cap benchmark indexes, and high beta against broad, all-market indexes. It discusses its benefits in the performance of European small-cap and mid-cap market segments, and how it can be used as suitable basis for tradable products on which exposure to and hedges against those segments is being built in both swap and futures form.