Tag: Russell Reconstitution

Russell Reconstitution 2024: The Ultimate Guide to This Year’s Index Shake-Up

Posted on by slightbourne@noblecapitalmarkets.com

The annual Russell reconstitution is one of the biggest events in the investing world, shaping the composition of the widely followed Russell indexes, including the influential Russell 2000 and Russell 3000 indexes. This comprehensive process ensures these indexes accurately represent various U.S. market segments by reflecting changes in company market capitalizations and characteristics.

What is the Russell Reconstitution?
The Russell reconstitution is an annual rebalancing process where all Russell equity indexes undergo a complete overhaul. During reconstitution, the index provider FTSE Russell rebuilds the Russell indexes from the ground up based on new data on eligible stocks’ market caps, trading volumes, and other criteria.

This vital event maintains the integrity of Russell indexes as accurate benchmarks by updating their holdings to reflect the current landscape of the U.S. stock market. Reconstitution allows companies that have grown or shrunk in value to be properly represented in the appropriate Russell indexes.

The Importance of the Russell 3000 Index
A major focus of the reconstitution is the Russell 3000 Index, considered one of the leading benchmarks for the overall U.S. equity market. This index aims to capture 98% of U.S. stocks by market cap.

On May 24, 2024, FTSE Russell published its annual reconstitution updates, revealing notable new additions to the Russell 3000 like Ocugen, Eledon Pharmaceuticals, NN Inc., and Bitcoin Depot. Such changes highlight how reconstitution allows the index to evolve with the market.

The Closely Watched Russell 2000 Index
Another keenly watched Russell index is the small-cap Russell 2000, which tracks the smallest 2,000 companies in the Russell 3000 by market cap. This index is considered a leading benchmark for small-cap U.S. stocks.

During reconstitution, companies can move in or out of the Russell 2000 based on changes to their market capitalization or investment style exposures like value vs growth. This rebalancing ensures the Russell 2000 precisely represents today’s small-cap universe.

IPO Additions Throughout the Year
In addition to the annual reset, FTSE Russell regularly adds eligible IPO stocks to its indexes on a quarterly basis. This allows newly public companies to quickly enter major benchmarks like the Russell 3000 instead of waiting for reconstitution.

Russell’s IPO treatment distinguishes between fully underwritten IPOs and partial or “best efforts” public offerings when determining appropriate share weights and eligibility.

Rebalancing Drives Major Trading Activity
Russell reconstitution is a major trading event, as index funds and ETFs tracking Russell benchmarks must rebalance their portfolios to match updated index constituents and weightings.

Estimates suggest hundreds of billions in assets follow the Russell benchmarks, meaning their reconstitution announcements can trigger massive shifts in demand for newly added or removed stocks.

Following Russell’s Transparent Methodology
FTSE Russell’s reconstitution process follows an objective, rules-based methodology spelled out in publicly available documentation. Key eligibility factors include:

  • Trading on eligible U.S. stock exchanges
  • Meeting minimum price, market cap, and liquidity thresholds
  • Sufficient public share float and voting rights
  • Eligible corporate structures like public operating companies

Staying on top of Russell’s transparent reconstitution rules allows investors to understand how index changes may impact their portfolios and positions.

The Russell Reconstitution’s Continuing Impact
As indexes like the Russell 3000 continue gaining prominence as core portfolio benchmarks, Russell reconstitution’s influence grows. The 2024 event reinforces the Russell indexes’ role in definitively capturing U.S. market performance by surgery evolving index holdings to match current realities.

Whether reallocating client assets, developing new index funds, or simply understanding market composition changes, the 2024 Russell reconstitution guide will prove essential reading for investors. Follow this yearly event closely, as it shapes the benchmarks driving U.S. equity allocations for years to come.

Upcoming 2024 Russell Reconstitution Schedule

Friday, May 31st, June 7th, 14th, and 21st – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6PM US eastern time.

Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.

Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

Russell Reconstitution 2024, What Investors Should Know

Posted on by slightbourne@noblecapitalmarkets.com

The Annual Russell Index Revision and Dates to Watch (2024)

The yearly process of recasting the Russell Indexes begins on Tuesday, April 30 and will be complete by market opening on June 30. During the period in between, FTSE Russell will rank stocks for additions, for deletions and evaluate the companies to make sure they conform overall. The methodology for inserting and removing tickers in the Russell 3000, Russell 2000, and Russell 1000 is intentionally transparent to help eliminate price shocks. Price movements do of course occur along the way, and investors try to foresee and capitalize on them. Channelchek will be providing updates that may uncover opportunities, or at least provide an understanding of stock price swings during this period.

Background

Russell index products are widely used by institutional and retail investors throughout the world. There is more than $20.1 trillion currently benchmarked to a Russell index. This includes approximately $12.1 trillion benchmarked to the Russell US Equity indexes. The trading volume of some companies moving into an index will heighten around the last Friday in June as fund managers seek to maintain level tracking with their benchmark target.

Opportunity

For non-passive investing, determining which stocks may benefit from moving up to a large-cap index, down to a smaller one, or into or out of the measurements is an annual event causing volatility around stocks. There has, of course, the potential for very profitable long and short trades. And the potential for an unwitting investor to be holding a company moving out of an index, which could cause less interest in the stock, and perhaps unfortunate performance.

Active investors should make themselves aware of the forces at play so they may either get out of the way or determine if they should become involved by taking positions with those being added or those at the end of their reign within one of the Russell measurements.

Dramatic Valuation Shifts

The leading industries and altered market-cap of companies of a year ago have changed dramatically from last year’s reconstitution. This will be reflected in the 2023 rebalancing and is going to impact a much larger number of companies than most years. That is to say, a higher percentage of companies than normal will move in, out, or to another index, and may be subject to amplified price movement.

The 2024 Russell Reconstitution Schedule:

• Tuesday, April 30th – “Rank Day” – Index membership eligibility for 2024 Russell Reconstitution determined from constituent market capitalization at market close.

• Friday, May 24 – Preliminary index additions & deletions membership lists posted to the FTSE Russell website after 6 PM US eastern time.

•   Friday, May 31st, June 7th, 14th and 21st – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6 PM US eastern time.

• Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

• Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.

• Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

Take-Away

The annual reconstitution is a significant driver of dramatic shifts in some stock prices as portfolio managers have their holding needs shifted within a very short period of time. Longer-term demand for certain equities is altered as well. Sizable price movements and volatility are expected, especially around the last week in June. In fact, the opening day of the reconstitution is typically one of the highest trading-volume days of the year in the US equity markets.

The market event impacts more than $9 trillion of investor assets benchmarked to or invested in products based on the Russell US Indexes. Portfolio managers that are required to track one of these indexes will work to have minimal portfolio slippage away from their benchmark.  The days and weeks from April 30 through the last Friday in June can create opportunities for investors seeking to benefit from price moves, Channelchek will be covering the event as stocks to be added to, or removed from this year’s Russell Reconstitution and other information plays out.

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What Exactly is the Russell Reconstitution?

Posted on by slightbourne@noblecapitalmarkets.com

If you’re an investor, there’s an annual event on Wall Street that you should be aware of – the Russell Reconstitution. While it may not get much mainstream attention, this yearly process can have a major impact on certain stocks and drive significant trading activity.

So what exactly is the Russell Reconstitution? Let’s break it down in simple terms.

The Russell family of indexes is one of the most widely-followed equity benchmarks. The headline Russell 3000 represents the broad U.S. stock market, while the Russell 1000 tracks large-cap stocks and the Russell 2000 focuses on small-caps.

These indexes aim to be an accurate representation of the overall U.S. public market at any given time. However, company valuations and rankings are constantly evolving as businesses grow, stagnate, or decline.

To ensure the indexes stay up-to-date and reflective of the current market, they go through an annual “reconstitution” process of completely rebuilding membership from the ground up.

Each year, the Russell indexes perform this rebuilding exercise based on the latest market capitalization rankings for U.S. public companies after the market closes on a predetermined “ranking day.”

Companies are re-ranked from largest to smallest based on their new market caps. The top x% make up the Russell 1000 large-cap index, the bottom y% are assigned to the small-cap Russell 2000 index, and so on across Russell’s various capitalization-based indexes.

This rebalancing and membership shuffle occurs annually to keep the indexes properly aligned with the ever-changing market landscape. Companies experiencing strong growth may graduate into a higher cap-weighted index, while those losing ground get demoted to lower indexes.

Being added to the Russell 1000 or Russell 2000 indexes can provide a meaningful boost to a stock. These indexes are tracked by hundreds of billions in assets, so inclusion often comes with heightened liquidity, passive fund exposure, and institutional investor interest.

Conversely, stocks being removed from the headline indexes can suffer the opposite effects of reduced volume, investor exits, and volatility as funds rebalance their holdings.

Historically, stocks slated for inclusion in the Russell 2000 small-cap index have enjoyed a “reconstitution rally” in the run-up period as index funds buy in ahead of the official rebalance. Those migrating out often see selling pressure over this pre-rebalance window.

Why the Russell Rebalance Matters

While seemingly an administrative exercise, the annual Russell Reconstitution has taken on outsized significance in recent decades due to the explosion of passive index-tracking investment vehicles and strategies.

As major funds reposition their portfolios to replicate the updated index compositions each year, it creates a temporary imbalance of concentrated buying and selling in the impacted stocks joining or leaving the main benchmarks.

This trading frenzy can unlock rapid changes in volume, volatility, and institutional ownership levels for stocks experiencing an index status change – especially those smaller names making the cut for inclusion in the Russell 2000.

As index funds have grown to control trillions in assets tracking these benchmarks, the annual Russell rebalancing period has become an increasingly important event to monitor, particularly for stocks straddling the cap thresholds between indexes.

What to Watch For

While the Russell Reconstitution operates seamlessly in the background for most investors, those holding impacted stocks may want to anticipate potential volatility and position accordingly in the typical multi-week period ahead of each year’s official rebalance implementation.

The annual event reinforces the profound impact that passive investment strategies can wield on individual stocks simply due to their membership status in closely-tracked equity benchmarks. For better or worse, joining or leaving a major index can drastically alter a stock’s profile and trading dynamics – at least in the short-term rebalancing period.

As indexing grows even more ubiquitous, watching for potential reconstitution impacts could remain a wise practice for active traders and investors holding smaller stocks near the index composition cutoff levels.

2024 Russell US Indexes Reconstitution Schedule

  • Tuesday, April 30th – “Rank Day” – Index membership eligibility for 2024 Russell Reconstitution determined from constituent market capitalization at market close.
  • Friday, May 24th – Preliminary index additions & deletions membership lists posted to the website after 6 PM US eastern time.
  • Friday, May 31st, June 7th, 14th and 21st – Preliminary membership lists (reflecting any updates) posted to the website after 6 PM US eastern time.
  • Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.
  • Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.
  • Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

This Year’s Russell Rebalance May Accelerate Market-Cap Sector Rotation

Posted on by phoffman@channelchek.com

Investors Already Wary of Big Tech’s Dizzying Heights May Deviate Away From Swelling Large Cap Weightings

What’s different about this year’s Russell Index Reconstitution?

When the market closes on Friday, June 23rd , the overall FTSE Russell 3000 index and the other indexes that it impacts, including the Russell 1000 Large-cap and Russell 2000 Small-cap index, will be rebalanced to reflect current market-cap size. When the bell rings on Monday June 26th, the indexes will have different members and adjusted weighting of those constituents. Some market watchers and analysts expect this year to be a “headache” for active portfolio managers. Here’s why.

The new FTSE Russell makeup is already known. There is only a small chance a change in that might occur between now and Friday, it is largely assured that the reconstitution will increase the concentration of the top ten biggest companies in the large-cap Russell 1000 Index to a historical high of 29%. Active managers that are already underweighted mega-caps and big tech represented in the large-cap indexes will have to decide if they are going to increase holdings or be even more underweighted in comparison to an index that investors are likely to compare them to.

Additionally, while active fund managers are freer to weight their portfolios (within the boundaries of the fund’s prospectus), investors tend to compare the returns of index funds to the performance of managed funds when investing. This would increase the size of the bet in terms of fund percentage for managed funds, some already underweighted in tech. They’ll have a decision to make.

Further confusing things on the large-cap side is that the wisdom of diversification is being tested. If ten of the largest company’s make up 29% of an index, one that financial advisors and mom-and-pop investors are comparing them to, then roughly mimicking its concentrations would reduce diversification. Investing in a fund with a more even balance of stocks had once been the primary driver of mutual funds’ growth in popularity.

The rebalancing will heap a higher weighting to mega-cap names, including those referred to as FAANG stocks. This group of companies have already had tremendous gains this year, a pace that history would indicate is not sustainable.

Just look at the numbers, as we near the mid-year mark in 2023.

To date the top 100 stocks in the Nasdaq, heavily weighted with mega-caps and large-cap tech, has increased 38.87%. Using historical returns, most would forecast that these topstocks have much more downside for the next six months than upside. Yet, to stay on the same playing field with index funds, managed money would have to bet against stock market history.

The largest of stocks, as demonstrated below, are pulling a lot of weight. Nvidia (NVDA) is up nearly 200%, Meta (META) returned 137%, Tesla (TSLA) is also up over 100%. A fund manager with flexibility could be torn; on the one hand, afraid to bet against such momentum, on the other, historical probabilities suggest they should.

Source: Koyfin

There’s recent evidence that portfolio managers are looking for value away from the mega-cap stocks that have had the kind of run that in some cases made them twice as expensive. The Russell Small-cap Index, which is part of the June rebalancing is made up of the lowest 2,000 companies in terms of market cap of the broader Russell 3000. June has been a great month for the index so far. The index month-to-date is up 7.75% compared to the Nasdaq 100’s 6.56%. This beats June’s returns for Microsoft (MSFT), Apple (AAPL), and Amazon, among others. The performance, which includes an increase of 3.6% and a 2.8% jump on June 6th indicates investors are rotating away from large-cap stocks that have become historically expensive and into smaller companies that are cheap by historical standards.

The reconstitution also provides investors in the weeks and hours leading up to the rebalance to speculate on how the rebalance will impact individual stocks. Since the preliminary list of changes was announced last month, companies expected to be added to the Russell 1000 Index have gained 4.9%, while the those that moved to a smaller-cap index have grown 11.3%, according to data compiled by Wells Fargo (6/14/23).

Take Away

The Russell Reconstitution elevates the percentage weighting of mega-cap tech stocks that usually trade in rough tandem. Mutual fund managers, and other managed money will have to rethink their weighting of a sector that has already skyrocketed on speculation of future growth.

There has already been signs of a slowdown of interest in mega-tech, compared to a significant increase in attention to small-caps that are cheap by most measures. If the rotation continues, money managers that adhere to tried and true wisdom related to diversification, and metrics like P/E ratios, may wind up the year outperforming the indexed funds they tend to be compared to.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.ft.com/content/01ad3636-f15c-42c2-ab2c-81418f8160be

https://www.forbes.com/sites/jjkinahan/2023/06/16/stocks-looking-to-keep-the-party-going/?sh=4e85e4c86067

The Russell Reconstitution Preliminary List

Posted on by phoffman@channelchek.com
Image Credit: Channelchek (S.L)

The New Russell Indexes Unconfirmed Versions – How Investors Use Them

The preliminary list of stocks to be included in the Russell Reconstitution, and also which Russell Index, is a huge day for many stock investors and the impacted companies as well. This year, it occurs on Friday, May 19. The list, although preliminary and subject to refinements each Friday through June, includes the stocks that are believed to meet the requirements based on valuations taken on April 28. This is the first official file from the popular index provider, in addition to informing the investor public what to expect when the indexes are reconstituted. The reconstitution can be expected to impact prices as index fund managers readjust holdings. The event also, for many, redefines market-cap levels that are considered small-cap, mid-cap, and large-cap.

Background

The Russell Reconstitution is an annual event that reconfigures the membership of the Russell indexes by defining the top 3000 stocks based on market-cap (Russell 3000), then the top 1000 stocks (Russell 1000), and reclassifying the smaller 2000 stocks to form the Russell 2000 Small Cap Index. These serve as a benchmark for many institutional investors, as the indexes reflect the performance of the U.S. equity market across different market-cap classifications. The reconstitution process adds, removes, and weights stocks to ensure the indexes accurately represent the market.

The Preliminary List which will be published after the market closes on May 19, 2023, is a crucial step in the market cap reclassification process. It provides market participants with an initial glimpse into potential additions and deletions from the indexes. The stocks listed on this preliminary roster may experience increased attention from investors, as it hints at potential buying or selling pressure once the final reconstitution is completed.

The newly reconstituted indexes become live after the market close on June 23.

Implications for Investors

The release of the Russell Preliminary List on May 19 could provide opportunities for investors, including:

Enhanced Market Visibility – Companies listed on the Preliminary List may experience increased trading volumes and heightened market popularity, or even scrutiny, as investors evaluate their potential inclusion in the Russell indexes.

Potential Price Movements – Stocks slated for addition or deletion from the indexes can experience price volatility as market participants adjust their positions to align with the anticipated reconstitution changes.

Portfolio Adjustments – Active managers who track the Russell indexes may need to realign their portfolios to reflect the new index constituents, potentially triggering buying or selling activity in affected stocks.

Investor Considerations

Stock market participants should consider the following factors when analyzing the Preliminary List and its potential impact:

Final Reconstitution – The Preliminary List is subject to changes in the final reconstitution, which is typically announced in late June. Investors should monitor subsequent updates to confirm the actual index membership changes. These updates may occur as the result of faulty data or dramatic changes to the company such as a merger since the April 28 market cap snapshot.

Fundamental Analysis – As always, the fundamentals and financial health of the companies should be among the most important factors for non-index investors to consider. In the past, potential additions often presented attractive investment opportunities, while potential deletions may mean the stock gets less attention from investors.

Take Away

The release of the Preliminary List on May 19, 2023, marks a significant milestone in the Russell Reconstitution process. Investors should pay close attention to the stocks listed, as they may experience increased market visibility and potential price movements. However, it is important to remember that the Preliminary List is subject to changes. Thorough fundamental analysis, including earnings, potential growth, and liquidity assessment, is prudent for most stock investments. For information to evaluate small-cap names, look to Channelchek as a source of data on over 6,000 small cap companies.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://research.ftserussell.com/products/downloads/FTSE_FAQ_Document_Russell_US_Equity_2023.pdf

Russell Reconstitution 2023, What Investors Should Know

Posted on by aweinsoff@channelchek.com
Image Credit: SL (Noble Capital Mkts)

 The Annual Russell Index Revision and Dates to Watch (2023)

The yearly process of recasting the Russell Indexes begins on Friday April 28 and will be complete by market opening on June 26. During the period in between, FTSE Russell will rank stocks for additions, for deletions and evaluate the companies to make sure they conform overall. The methodology for inserting and removing tickers in the Russell 3000, Russell 2000, and Russell 1000 is intentionally transparent to help eliminate price shocks. Price movements do of course occur along the way, and investors try to foresee and capitalize on them. Channelchek will be providing updates that may uncover opportunities, or at least provide an understanding of stock price swings during this period.

Background

Russell index products are widely used by institutional and retail investors throughout the world. There is more than $20.1 trillion currently benchmarked to a Russell index. This includes approximately $12.1 trillion benchmarked to the Russell US Equity indexes. The trading volume of some companies moving into an index will heighten around the last Friday in June as fund managers seek to maintain level tracking with their benchmark target.

Opportunity

For non-passive investing, determining which stocks may benefit from moving up to a large-cap index, down to a smaller one, or into or out of the measurements is an annual event causing volatility around stocks. There has, of course, the potential for very profitable long and short trades. And the potential for an unwitting investor to be holding a company moving out of an index, which could cause less interest in the stock, and perhaps unfortunate performance.

Active investors should make themselves aware of the forces at play so they may either get out of the way or determine if they should become involved by taking positions with those being added or those at the end of their reign within one of the Russell measurements.

Dramatic Valuation Shifts

The leading industries and altered market-cap of companies of a year ago have changed dramatically from last year’s reconstitution. This will be reflected in the 2023 rebalancing and is going to impact a much larger number of companies than most years. That is to say, a higher percentage of companies than normal will move in, out, or to another index, and may be subject to amplified price movement.

The 2023 Russell Reconstitution Schedule:

• Friday, April 28 – “Rank Day” – Index membership eligibility for 2023 Russell Reconstitution determined from constituent market capitalization at market close.

• Friday, May 19 – Preliminary index additions & deletions membership lists posted to the FTSE Russell website after 6 PM US eastern time.

•   Friday, May 26th, June 2nd, 9th and 16th – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6 PM US eastern time.

• Monday, June 5th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

• Friday, June 24 – Russell Reconstitution is final after the close of the US equity markets.

• Monday, June 27 – Equity markets open with the newly reconstituted Russell US Indexes.

Take-Away

The annual reconstitution is a significant driver of dramatic shifts in some stock prices as portfolio managers have their holding needs shifted within a very short period of time. Longer-term demand for certain equities is altered as well. Sizable price movements and volatility are expected, especially around the last week in June. In fact, the opening day of the reconstitution is typically one of the highest trading-volume days of the year in the US equity markets.

The market event impacts more than $9 trillion of investor assets benchmarked to or invested in products based on the Russell US Indexes. Portfolio managers that are required to track one of these indexes will work to have minimal portfolio slippage away from their benchmark.  The days and weeks from April 28 through the last Monday in June can create opportunities for investors seeking to benefit from price moves, Channelchek will be covering the event as stocks to be added to, or removed from this year’s Russell Reconstitution and other information plays out.

Be sure to register to receive Channelchek updates and information.

Paul Hoffman

Managing Editor, Channelchek