The volatility of the Russell 1000 and Russell 2000—as measured by the annualized rolling three-year standard deviation of monthly returns—in the cap weight, SEW and CEW indexes is displayed in Figures 8 and 9.
The Russell 1000 cap-weighted index has lower volatility than both of the respective equal-weighted indexes for the entire period, except in the late 1990s, when the volatility of the cap-weighted indexes exceeds the level of the other two indexes, going from a low of 8.0 percent at the end of April 1996 to a high of 19.5 percent on April 2001. The SEW index consistently has lower volatility than the CEW index. The Russell CEW 1000 index has significantly higher volatility than the other two indexes from 2002 to 2005, deviating as much as 3 percent from the SEW index.
In contrast, as we show in Figure 9, the Russell 2000 cap-weight index does not consistently display lower volatility than the Russell 2000 SEW. The SEW index shows lower volatility than the cap-weighted indexes from 1982 to 1993 and during the technology boom-and-bust period, while the cap-weighted indexes have lower volatility for much of the current decade. There is no significant period of time during which the CEW index has lower volatility than the cap-weighted index or the SEW index.
We observed similar return and risk characteristics when we tested the SEW and CEW methodologies based on the Russell Global indexes. The SEW index consistently outperformed the CEW index, with lower volatility.