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1 Russell 2000 vs the S&P500 Performance of Russell 2000 PE Performance of Russell 2000 This week…

Russell 2000 Index Versus the S&P500 Index – Which is Better?

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• Russell 2000 vs the S&P500

• Performance of Russell 2000

• PE Performance of Russell 2000

This week…

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General Advice & Risk Warning

Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or

advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You

can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment

objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are

for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product

Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you

decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:

• Russell 2000 vs the S&P500

• Performance of Russell 2000

• PE Performance of Russell 2000

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Dear Readers,

Throughout the monthly of November we will bepublishing our views and insights on US stockmarkets, following key results and how thisimpacts the Dow, S&P500, NASDAQ and Russel200 index. With quantitative easing nowcomplete and all eyes on the US marketrecovery, we thought it important to explore keythemes coming out of US companies and howthis impacts the largest stock indices in theworld.

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As usual the commentary from the next four weeks will be followed by our monthlywebinar. Invast clients will also have access to a webinar presented by Invast Insightseditor Peter Esho this week on Tuesday 25 November at 6:30PM.

Our focus will be on the key names that drive each index. We will spend the first fewweeks look at individual company results and then the later part of the monthdetermining where the indices are going. Our approach is bottom up, we look atindividual stocks to determine where the broader market is heading. We don’t just lookat financial numbers in isolation, but focus on important comments also, as theyhighlight corporate confidence and signal intentions among traders.

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Our weekly summary will be as follows:

• Week commencing 3 November 2014 – US reporting season highlights – focus onkey Dow stocks• Week commencing 10 November 2014 – US reporting season highlights – focus onkey NASDAQ and technology names• Week commencing 17 November 2014 – US reporting season highlights – focus onthe Russell 2000 and key names within the index• Week commencing 24 November 2014 – Summary for price and valuation on thekey indices, where they are heading into 2015

• Week commencing 17 November 2014 – US reporting season highlights – focus onthe Russell 2000 and key names within the index

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Over the past two weeks we have written about two distinct indices – the Dow Jonesand the NASDAQ 100. We hope to have provided you with a framework around wherethe most statistically significant risks and opportunities are for each index. The Dow issomewhat extreme in that it only contains 30 names while the NASDAQ is very heavilyexposed to Apple and other technology names. We originally had a choice this week toeither discuss the S&P500 or the Russell 2000 as a broad index. We chose the latterbecause we think it sometimes goes unnoticed and neglected among the choice oftrading the board US market.

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We chose the Russell because of its diversity:

• It has very low concentration in the top 10 names relative to the S&P500. Forexample the top 10 names on the Russell 2000 constitute 2.95% of the index while thetop 10 names on the S&P500 represent around 17.8% of the index.• It has higher beta relative to the S&P500 and is more sensitive to marketmovements. We estimate the beta of the Russell 2000 relative to the S&P500 at 1.38 –meaning more volatility which many traders prefer when the market is rising or falling.• It has a very different set of diversity in industry exposures. See the comparisontables below.

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Many institutional fund managers who invest in smaller capitalised companies (smallcaps) prefer to benchmark against the Russell 2000. The most striking differencebetween the Russell and its peers is the absence of large dominant names like Applewhich now appear on all three other US indices. If you are not a believer in Apple’smarket capitalisation or if Apple was to collapse for example, the difference in beingexposed to the Russell relative to the other indices is huge.

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Image: Russell 2000 quoted as US2000 on Invast MT4 platform, daily chart

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The Apple factor has been a huge drag for the Russell relative to the S&P500 over thepast year. The S&P500 index is up around 15.7% compounded annually over the past fiveyears relative to the 14.3% rise in the Russell. The difference over the past year is evenlarger, under performing by around 16%.

Because of the low concentration of large names and huge diversity in the index, smallercompanies within the Russell 2000 have the ability to generate huge returns. Those inthe top 10 names would have generated much larger returns than those in the top 10names of the S&P500. To illustrate, here are the top 5 names on the Russell 2000 andthe performance of each stock over year past year.

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The Russell 2000 index is basically an exposure to a large collection of riskier, butemerging high-growth companies. The S&P500 is an exposure to the largest, healthiestand most trusted names but once which potentially don’t have as much growth. Inperiods of uncertainty, the market will opt to stick with the safer names.

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Image: S&P500 quoted as SPX500 on Invast MT4 platform, daily chart

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So what will turn the short term fortunes of the Russell 2000 relative to the S&P500?The big key to answering this question is earnings growth. Earnings will either grow byhigher revenue, lower costs or a combination of both. Recent falls in energy prices arevery significant, perhaps more so for the Russell 2000 which has a lot less exposure toenergy producers and more exposure to energy consumers.

The Russell 2000 is currently trading on a price to earnings ratio of around 19.4x. If usingtoday’s share prices on earnings a year ago, this ratio would be equal to around 87.4x.This means that the earnings growth in the Russell 2000 has underpinned the growth inshare prices. The S&P500 for example is trading on around 16.7x based on estimateearnings.

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If lower energy prices and a slightly gradual increase in interest rates is to take place, theRussell 2000 may very well close the gap between its price performances this year andthat of the S&P500. The Russell 2000 might be trading on a higher earnings multiplerelative to the S&P500, though its dividend yield is expected to be at 1.35% this yearwhich isn’t too far away from the NASDAQ 100 which we wrote about last week.

Bottom line: Most traders chose to take a position on either the Dow, NASDAQ100 orthe S&P500. All three of these indices have a strong concentration to certain names,including Apple which we wrote about in detail last week. As energy prices fall, there willbe a huge multiplier effect across the US economy. Consumers will have more disposableincome but equally important, smaller emerging companies exposed to trader andmanufacturing will have some cost relief. The Russell 2000 might capture this trendbetter than the other indices because it is not exposed to large energy companies.

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If you want exposure to US companies but not Apple or the large oil companies, theRussell 2000 presents a compelling option. Contrarian traders might also find comfort inthe fact that the Russell 2000 has risen by only 2.1% year to date compared with 12.3%for the S&P500 and 13.3% for the NASDAQ Composite.

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Next week we will elaborate in more detail where we think the three major US indicesdiscussed in our reports this month will trend in 2015. We will look at current market earningsestimations and measure the likelihood of these against a rising interest rate environment.Make sure you register early for this month’s webinar where we will walk through our Insightsin more detail.

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US stock market outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise his Novemberoutlook for US markets, focusing on key indices like the Dow Jones, S&P500, NASDAQ andRussell 2000. Esho will go through recent company results to determine how the US economyis shaping up after the completion of quantitative easing.

Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In hiswebinar he will outline:

How have recent company results fare in the US marketWhat signals are companies suggesting about the economyWhat valuations are implied by the key indices at the momentOutlook for where Wall St will go in 2015

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Peter’s webinar will cover both the fundamental and technical outlook on key US indicesquoted on Invast’s MT4 platform, plus the key drivers to look out for when trading. Thiswebinar is expected to fill fast. Q&A will be open straight after the presentation. CLICKHERE to register.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd(AFSL 438 283). Invast staff members may from time to time purchase securities which areincluded in this or future reports. The authors of this report may or may not be holding a positionin the securities mentioned. Please note that the information contained in this report and Invast'swebsite is of a general nature only, and does not take into account your personal circumstances,financial situation or needs. You are strongly recommended to seek professional advice beforeopening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for theperson who downloaded it. You should not disseminate, distribute or copy this newsletter. Invastdoes not accept liability for any errors or omissions in the contents of this newsletter which ariseas a result of downloading this newsletter. This newsletter is provided for informational purposesand should not be construed as a solicitation or offer to buy or sell any financial product. InvastFinancial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product DisclosureStatement, and any other relevant Invast Financial Services Pty Ltd documents before youdecide whether or not to acquire any financial products listed in this email. Our FinancialServices Guide contains details of our fees and charges. All these documents are available hereon our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange areleveraged products and carry a high level of risk and you can lose more than your initial depositso you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of yourobjectives, financial situation or needs. Before acting on this general advice you shouldtherefore consider the appropriateness of the advice having regard to your situation. Werecommend you obtain financial, legal and taxation advice before making any financialinvestment decision.

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