(Bloomberg) -- Options traders are the most bearish on small U.S. companies since June 2012 as investors look for safer stocks after the worst selloff in more than a year.

Implied volatility on the iShares Russell 2000 ETF is 7.03 points above an exchange-traded fund tracking the Standard & Poor’s 500 Index, according to data compiled by Bloomberg on one-month contracts with an exercise price closest to the shares. The difference was 7.59 on Feb. 4, the widest gap in almost two years and 74% higher than the year average.

Smaller stocks are vulnerable because they’re expensive and during a broad equity decline they will trail the market, according to strategists at Credit Suisse Group AG and Bank of America Corp. The Russell 2000 Index has lost 7.4% in the past two weeks, compared with a 5% drop for the S&P 500.

“Small-caps are leading the way on the downside,” Bruce Bittles, chief investment strategist at RW Baird & Co., said by telephone from Sarasota, Florida. His firm oversees $105 billion. “If this is a consolidation year in stocks, larger- caps will outperform as more money goes into defensive areas of the market and out of aggressive ones.”

Equity volatility has surged amid a selloff in emerging- market currencies, signs of slowing economic growth in China and stimulus reductions from the Federal Reserve. The Chicago Board Options Exchange Volatility Index, known as the VIX, jumped 34% last month for the biggest January advance since it was created in 1990. The S&P 500 lost 3.6% last month, the most since May 2012.

Stocks Selloff

Smaller companies tend to underperform when the VIX rises, according to Lori Calvasina, the New York-based head of U.S. small and mid-cap equity research at Credit Suisse. When the VIX jumped 32% in 2011, the Russell 2000 dropped 5.5% and the S&P 500 was unchanged.

Even after the selloff in stocks this year, the Russell 2000’s valuation is stretched, according to Credit Suisse and Bank of America. The gauge currently trades at 22.3 times estimated earnings, about 50% more than the S&P 500’s multiple, according to data compiled by Bloomberg.

Implied volatility, a measure of options costs, for one- month contracts on the small-cap ETF with a strike price closest to the current level jumped 47% this year to 22.90. For the ETF tracking the S&P 500, implied volatility has increased 42% to 15.88, data compiled by Bloomberg show.

Overseas Sales

Small-cap stocks will be shielded from declines if emerging markets keep weakening because the profits are less tied to business overseas, according to Frances Hudson, a strategist at Standard Life Investments Ltd. in Edinburgh, which oversees $294 billion. The median company in the Russell 2000 takes in all of its revenue from North America, compared with 74% in the S&P 500, according to financial reports compiled by Bloomberg.

“Large-caps are more international and will be more exposed to any problems in emerging markets,” Hudson said by phone. “If there is a recovery in the U.S. economy, small-caps are not a bad place to be.”

The pace of economic growth in China is among the biggest questions in developing nations and the largest risks for markets, Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., said earlier this week. China’s economic expansion is forecast to be 7.4% this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

Bearish Contracts

Options traders own twice as many bearish contracts on the Russell 2000 ETF versus bullish ones. Ownership of puts was 3.09 million on Feb. 4 versus 1.54 million for calls, according to data compiled by Bloomberg.

Among the 10 most-owned contracts, seven were bearish. March $105 puts, with an exercise price about 3% below the ETF shares, had the largest open interest, followed by February $105 puts, the data show.

The CBOE Russell 2000 Volatility Index, which tracks the cost of options on the small-cap gauge, added 2.7% to 25.80 yesterday. The gauge is up 47% this year. The VIX had a daily increase of 4.4% to 19.95. Europe’s VStoxx Index slipped 2.1% to 22.18 at 10:22 a.m. in Frankfurt.

Earnings from small companies have been disappointing, according to Steven DeSanctis, the small-cap strategist at Bank of America. Among companies in the Russell 2000 that have reported, 37% fell short of analysts’ profit estimates, compared with 22% for S&P 500 companies, data compiled by Bloomberg show.

“We still see unattractive valuations and not many cheap stocks in the universe,” New York-based DeSanctis wrote in a Feb. 4 note. “Stocks got ahead of earnings and based on a small sampling of the reporting season that is complete, we see that numbers are coming in below expectations.”

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