Posted by Kent Cullinane, Research Analyst
Wednesday, June 28, 2023
On Friday, June 23, FTSE Russell’s (Russell) U.S. indices went through their annual reconstitution. This process refreshes the breakdown of equities by market capitalization (large, mid, and small) and investment style (value and growth) that make up Russell’s indices.
The reconstitution is required because the criteria that defined stocks by market cap and investment style in the past may no longer apply. The reconstitution is one of the year’s heaviest trading days as asset managers, especially index funds that track Russell indices like the Russell 3000, adjust their portfolios to reflect changes. Approximately $12 trillion in assets are benchmarked to Russell indices and this year, $61.7 billion in securities traded in a span of under one second, more than three times the New York Stock Exchange’s average daily volume.
This year, there were some notable changes amongst some of the underlying indices that compose the Russell universe. The criteria applied to each stock regarding investment style, growth or value, was updated. The Russell 1000 Growth Index, which is comprised of roughly 450 stocks that exhibit growth characteristics, such as high earnings growth rates and sales-per-share growth rates, saw the communication services sector increase from 7.4% to 11.0% of the index. The primary reason for this change was Facebook’s parent company Meta moving back to growth from value. The Russell 1000 Value Index, which is comprised of roughly 850 stocks that exhibit value characteristics, such as high book-to-price ratios, saw the industrials sector weighting decrease the most, as some value stocks migrated to the Russell 1000 Growth Index. The chart below shows a breakdown of the sector changes in the Russell 1000 Value and Russell 1000 Growth post reconstitution:
Additionally, there were changes amongst the underlying market cap based indices that are components of the Russell 3000 (that represents 98% of the investable U.S. equity market), the Russell 1000 and the Russell 2000. The Russell 1000 Index, which is comprised of the 1,000 largest domestic stocks by market cap, added 33 new stocks to the index, with 24 of those moving up from the Russell 2000 Index— comprised of the next 2,000 largest domestic stocks by market cap. To make room for the additions, 25 stocks were relegated to the Russell 2000, while the remaining 8 stocks were removed from the Russell 3000 universe, delisted, or were the product of a merger or acquisition.
The top 10 components of the Russell 1000 by market weighting made up 10.9% of the index, up from 10.7% percent last year, highlighting the continued concentration at the top of major large-cap indices. The technology sector remained the largest sector by market weighting within the index, increasing from 28.2% to 29.2% largely due to the sector’s price appreciation relative to the broader growth space.
The Russell 2000 in terms of total market cap decreased meaningfully from last year, as small caps underperformed the broader market. As of April 28, 2023, the day the preliminary lists of the expected reconstitution are set, the market cap of the Russell 2000 was $2.7 trillion, down 10% from $3.0 trillion the prior year, including 192 stocks that moved up to the Russell 2000 from the Russell Microcap Index, along with those moving down from the Russell 1000 and additions from outside the Russell universe or recent initial public offerings, new additions totaled 297. The technology sector increased the most from the prior reconstitution, representing 11.8% of the index, compared to 10.6% previously. The largest sector by weighting remained the industrials sector at 17.7%, followed by health care (17.4%) and financials (14.2%).So, what does the Russell reconstitution mean for your portfolio? While many stocks were reclassified due to the reconstitution, turnover within indexes remained relatively low, typical of past reconstitutions. The uptick in volatility on reconstitution day has also come down in recent years, as Russell releases preliminary changes nearly two months in advance, allowing institutional investors and traders the ability to adjust their portfolios ahead of time. Given the trillions of dollars of assets that are benchmarked to Russell indices we believe it is important to understand how and why the reconstitutions happen but that there are likely no immediate actions required in response.
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