It has been 965 trading days since the Russell 2000 last registered a record closing high on 11/5/2021. With the Russell 2000 only making up ~5% of the Russell 3000 (an index representing roughly 97% of public U.S.-listed securities), investors have mostly moved on, opting for the Magnificent Seven, and other large cap growth stocks.
Recent price action suggests small caps are trying to flip the script. 83.5% of small caps are up from the April 2025 low. With the average small cap stock up 40.6% since April 8, the Russell 2000 is now just 3% away from closing at an all-time high. Internally, over 60% of the index is trading above their respective 200-day moving average, the highest reading in roughly 9 months.
In tandem with an improving chart, small caps are perking up relative to large caps. While not a decisive leadership group yet, the green shoots from an absolute and relative price perspective are a good start. Relative valuations are also subdued, with the Russell 2000 near the lower end of its range versus the S&P 500.
What’s the Catch?
Despite strong price action and an interesting valuation backdrop skepticism is normal given its inconsistent track record over the past four years. Small caps likely benefitted from flourishing risk appetite coming out of April’s major market low, as a rising tide lifts all boats.
From a fundamental perspective, the Russell 2000 has a quality problem. 43% of the Russell 2000 were not profitable over the last twelve months. Incredibly, the entire Russell 2000 actually makes less net income than Apple Inc (AAPL).
A Solution to Small Cap Index Investing
Launched on 9/10/24, the Roundhill Russell 2000 0DTE Covered Call Strategy ETF (RDTE) seeks to provide overnight exposure to the Russell 2000® and generate income each morning by selling out-of-the-money 0DTE calls on the Index. In our view, RDTE is a compelling alternative to an index investing approach to small caps.
Since inception, the covered call investing approach has rewarded investors. In its first year through 9/10/25, RDTE recorded a market price total return of 16.23%, outperforming the Russell 2000’s total return of 14.90%.
Performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end and standardized performance, please call 646-661-5441 or visit the Fund’s website: https://www.roundhillinvestments.com/etf/rdte/
RDTE generally reduces intraday volatility by selling call options each morning. As a result, RDTE achieved lower realized volatility compared to its Russell 2000 benchmark.
The Active Management of RDTE
The active management approach to the strike selection of RDTE’s 0DTE call writing is an important contributor to the fund’s success to-date. RDTE has recorded an 83.5% win ratio, meaning 83.5% of days since RDTE’s launch have seen the 0DTE call options expire out-of-the-money. Since launch, RDTE has delivered a more attractive return profile than a simple Russell 2000 exposure by harvesting 0DTE option premium while actively managing strike selection. This approach can help dampen day-to-day volatility and cushion portfolios in market pullbacks, offering a compelling way to maintain small cap exposure with a smoother ride relative to owning the index outright.
Glossary:
The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 29, 1978.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
50-Day Moving Average: A simple moving average is constructed by taking a mean average of a time series (50-day) over a given period of time. Moving average often provides a better indicator of trends.
200-Day Moving Average: A simple moving average is constructed by taking a mean average of a time series (200-day) over a given period of time. Moving average often provides a better indicator of trends.
Absolute Performance (Return): Absolute performance is the return an asset achieves over a period of time.
Relative Performance (Return): Relative performance is the return an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the asset’s return and the return of the benchmark.
Relative valuation estimates a company’s worth by comparing it to other companies'. It uses financial ratios or multiples of similar businesses to judge the company’s value. The idea is that companies with similar operations should trade at similar multiples
Call Option: A financial contract giving the buyer the right (but not the obligation) to purchase an underlying asset at a specified price (strike) before a certain date (expiration).
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus, if available, with this and other information about the Fund, please call 1-855-561-5728 or visit our website at https://www.roundhillinvestments.com/etf/RDTE. Read the prospectus or summary prospectus carefully before investing.
All investing involves risk, including the risk of loss of principal. There is no guarantee the investment strategy will be successful. For a detailed list of fund risks see the prospectus.
Covered Call Strategy Risk. A covered call strategy involves writing (selling) covered call options in return for the receipt of premiums. The seller of the option gives up the opportunity to benefit from price increases in the underlying instrument above the exercise price of the options, but continues to bear the risk of underlying instrument price declines. The premiums received from the options may not be sufficient to offset any losses sustained from underlying instrument price declines. Exchanges may suspend the trading of options during periods of abnormal market volatility. Suspension of trading may mean that an option seller is unable to sell options at a time that may be desirable or advantageous to do so.
Additionally, the Fund is a “synthetic” covered call strategy, meaning that it derives its long exposure to the Russell 2000® Index from options that utilize the Russell 2000® Index as the reference asset. This synthetic exposure increases the likelihood that the Fund’s returns may not always precisely align with the returns of the Russell 2000® Index.
Options Risk. The use of options involves investment strategies and risks different from those associated with ordinary portfolio securities transactions and depends on the ability of the Fund’s portfolio managers to forecast market movements correctly. The prices of options are volatile and are influenced by, among other things, actual and anticipated changes in the value of the underlying instrument, or in interest or currency exchange rates, including the anticipated volatility, which in turn are affected by fiscal and monetary policies and by national and international political and economic events. The effective use of options also depends on the Fund’s ability to terminate option positions at times deemed desirable to do so. There is no assurance that the Fund will be able to effect closing transactions at any particular time or at an acceptable price. In addition, there may at times be an imperfect correlation between the movement in values of options and their underlying securities and there may at times not be a liquid secondary market for certain options. Lastly, the trading of options is subject to transaction costs that may impact the Fund’s returns.
Flex Options Risk. Trading FLEX Options involves risks different from, or possibly greater than, the risks associated with investing directly in securities. The Fund may experience losses from specific FLEX Option positions and certain FLEX Option positions may expire worthless. The FLEX Options are listed on an exchange; however, no one can guarantee that a liquid secondary trading market will exist for the FLEX Options.
0DTE Options Risk. The Fund’s use of zero days to expiration, known as “0DTE” options, presents additional risks. Due to the short time until their expiration, 0DTE options are more sensitive to sudden price movements and market volatility than options with more time until expiration. Because of this, the timing of trades utilizing 0DTE options becomes more critical. Although the Fund intends to enter into 0DTE options trades on market open, or shortly thereafter, even a slight delay in the execution of these trades can significantly impact the outcome of the trade. Such options may also suffer from low liquidity, making it more difficult for the Fund to enter into its positions each morning at desired prices. The bid-ask spreads on 0DTE options can be wider than with traditional options, increasing the Fund’s transaction costs and negatively affecting its returns. Additionally, the proliferation of 0DTE options is relatively new and may therefore be subject to rule changes and operational frictions. To the extent that the OCC enacts new rules relating to 0DTE options that make it impractical or impossible for the Fund to utilize 0DTE options to effectuate its investment strategy, it may instead utilize options with the shortest remaining maturity available or it may utilize swap agreements to provide the desired exposure.
Derivatives Risk. The use of derivative instruments (i.e. options contracts) involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments.
Distribution Tax Risk. The Fund currently expects to make distributions on a weekly basis. These distributions may exceed the Fund’s income and gains for the Fund’s taxable year. Distributions in excess of the Fund’s current and accumulated earnings and profits will be treated as a return of capital.
Russell 2000® Index Risks. The Fund will have significant exposure to the Russell 2000® Index through its investments in options that utilize the Russell 2000® Index as the reference asset.
Small Capitalization Companies Risk. Small and/or mid capitalization companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, fewer products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies.
Roundhill Financial Inc. serves as the investment advisor. The Funds are distributed by Foreside Fund Services, LLC which is not affiliated with Roundhill Financial Inc., U.S. Bank, or any of their affiliates.
