Considering there’s approximately $8.5 trillion in assets benchmarked to the Russell U.S. Indexes, the Russell Reconstitution is a major event. Each year Russell Indexes are reconstructed to accurately reflect the U.S. equity market and its segments (market cap. & style). Designed to capture changes, the reconstitution accounts for new companies introduced via IPOs, market values of companies increasing/decreasing, share adjustments, etc.
Once a year, equity portfolios benchmarked to the Russell Indexes will need to adjust their positions reflecting the reconstitution changes. The reconstitution process culminates into an extraordinary market-on-close transaction at the end of one day. This total process happens in stages between May and June annually. To highlight, last year’s portfolio rebalances led to transactions of over 972 million shares and a market value of approximately $28.9 billion executed at the close on June 23, 2017.
May 11: “Rank day” – A preliminary list of the largest 4,000 U.S. publicly traded equity constituents are ranked and considered for inclusion into the reconstituted Russell 3000 Index. Each company’s shares are adjusted on a free-float basis to include only shares that are publicly available inclusion into the Russell Indexes.
June 8: Preliminary membership lists including constituent additions and deletions is posted by FTSE Russell on its website after 6:00 p.m. (EST).
June 15: An updated version of the preliminary membership list with additions and deletions is posted by FTSE Russell on its website after 6:00 p.m.
June 22: The newly reconstituted indexes are implemented after the market closes.
June 25: Equity markets open with newly reconstituted Russell Indexes.
Russell Index Descriptions:
Russell 3000® Index – A market capitalization weighted equity index measuring the performance of the 3,000 largest U.S. traded stocks, which represents approximately $27.2 trillion in market capitalization and 98% of the U.S. equity market. In 2017, the largest-cap = $813.9 billion and the smallest cap = $143.6 billion.
Russell 1000® Index – A subset of the Russell 3000 Index measuring the performance of the largest 1,000 companies in the U.S. equity large-cap universe ranked between 1 – 1,000. The Russell 1000 represents approximately $24.9 trillion in market capitalization, 90% of the Russell 3,000® Index. The market capitalization for the largest company = $813.9 billion and the smallest company = $2.4 billion.
Russell 1000® Growth Index – Measures the performance of the growth segment of the Russell 1000 constituents as defined by higher price-to-book ratios and higher expected earnings growth rates.
Russell 1000® Value Index – Measures the performance of value segment of the Russell 1000 constituents as defined by lower price-to-book ratios and lower expected long-term mean earnings growth rates.
Russell 2000® Index – A subset of the Russell 3000® Index measuring the performance of the U.S. equity small-cap universe including the smallest companies ranked between 1,001 – 3,000. The Russell 2000 represents approximately $2.3 trillion in market capitalization, 8% of the Russell 3000 Index. The market capitalization for the largest company is $4.4 billion and the smallest company is $143.6 million.
Breakpoints and Banding:
Breakpoints are levels of market capitalization that determine where companies belong within large, mid. and small-cap indexes. These breakpoints will adjust as the equity market’s total market capitalization changes. For example, in 2017, the total market cap of the Russell 3000 Index increased around 13% from the previous year, reaching a total market cap of $27.2 billion. As a result, the breakpoint between large- and small-cap increased by 17% from a minimum market cap of $2.9 billion to $3.4 billion.
A Banding threshold is applied to smooth the rebalancing transition by reducing turnover and transaction costs. Companies at or near the breakpoints and within a 5% banding range are considered for migration across the breakpoints. Companies will migrate when their updated market cap falls outside of the 5% band. It will then be added or removed from the appropriate index including style indexes.
Source: FTSE Russell
Russell 2000 Index Reconstitution & Low Volatility:
Options on the Russell 2000 Index are the third most actively traded cash-settled index option market on Cboe. The small-cap index, Russell 2000, typically carries a higher level of volatility, as small-cap stocks tend to have wider price dispersions. As highlighted below, over the last 3 years, the level of volatility during the Russell reconstitution has been within 10.96 – 19.53, less than the average, indicating that the Russell Reconstitution’s impact on the market has been minimal.
For additional information on Russell Index options, please visit the following sites:
Russell 2000 Index (RUT) – www.cboe.com/RUT
Russell 1000 Index (RUI) – www.cboe.com/RUI
Russell 1000 Growth Index (RLG) – www.cboe.com/RLG
Russell 1000 Value Index (RLV) – www.cboe.com/RLV
For additional information on the Russell Reconstitution, please visit:
2018 Reconstitution Calendar - https://www.ftserussell.com/index-series/index-resources/russell-reconstitution
Russell Reconstitution Infographic - https://www.ftserussell.com/because-markets-change-infographic