What to Know Heading into FTSE Russell’s 36th Annual Russell Reconstitution

Rick Rosenthal
June 7, 2024

It’s that time of year! FTSE Russell’s 36th Annual Russell Reconstitution is underway. The well-honed process of updating the U.S. Russell benchmark indices takes place each year to reflect changes in the U.S. publicly traded equity markets.

According to the World Bank, the U.S. equity market consists of over 4,000 domestic companies with a total market capitalization of $53 trillion. To provide greater access to this market, FTSE Russell created the Russell 3000 Index, which measures the largest 3,000 companies or 96% of the investable U.S. equity market The Russell 1000 Index and Russell 2000 Index are subsets of the Russell 3000, tracking large-cap companies and small and mid-caps, respectively.  

Recalibrating Benchmarks

The annual Russell Reconstitution process rebalances each index, holding a mirror to ­­the universe of U.S. equity market segments to reflect changes in market capitalization, sector compositions, Initial Public Offerings (IPOs) and more. Each year, this multi-week process culminates into one of the largest volume days of the year. With over $10.5 trillion in investor assets benchmarked to products based on Russell’s U.S. Indices, portfolio managers will rebalance their holdings by trading over $100 billion in equities on what‘s known as “Recon Day.”

Russell Reconstitution Events

April 30 marks “Rank Day,” when constituents are ranked based on market capitalization to determine index membership eligibility.

On May 24 FTSE Russell announces preliminary constituent additions and deletions to respective indices. The Russell 1000 Index will add three IPOs and 38 companies 28 of which come from the Russell 2000 Index. The Russell 2000 Index will add 11 IPOs, 30 companies from the Russell 1000 and 116 companies from the Russell Microcap Index. 

On May 31, June 7, June 14 and June 21, FTSE Russell announces preliminary membership lists to each Russell Index.

On June 10 FTSE Russell initiates a “lock down” period, providing updates to constituent members of each index that should be considered final.

June 28 is Russell Recon Day. The indices are rebalanced at the close of the U.S equity markets and investment managers adjust their holdings, trading approximately $130 billion in equities on the close.

On July 1, newly reconstituted Russell U.S. indices are calculated and disseminated.

A Focus on Russell 2000 Index

As the barometer for U.S. small-cap companies, let’s take a closer look at the unique characteristics of the Russell 2000 Index. This index represents approximately seven percent of the total market capitalization, valued close to $3 trillion. To put this in perspective, the Russell 2000 Index total market capitalization is on par with Apple Inc. or Microsoft. The market capitalization of companies within the Russell 2000 Index can range from $150 million to $7.1 billion, with an average market capitalization of $4.3 billion.

Comparing small-cap versus large-cap sectors illustrates the significant differences in industry representations and the influence on the Russell index price performance. Industrials, Health Care and the Financial Sector make up 49% of the total Russell 2000 Index. In comparison, the top three industry weightings in the Russell 1000 Index are Informational Technology, Consumer Discretionary and Industrials and make up 60% of the total index. A heavier weighting in Information Technology has been a major contributor towards the Russell 1000 Index’s outperformance relative to the Russell 2000 Index.

Factors contributing to the performance and levels of volatility in the Russell 2000 Index include:

  • Industry sector weightings
  • Domestic business activity heavily contributes to small-cap companies’ revenues.
  • Small-cap companies are typically leveraged and sensitive to interest rates.

Cboe’s Russell 2000 Volatility Index

Considering the magnitude of trading expected on “Recon Day,” volatility may be expected during the Russell Reconstitution Period. 

Cboe’s Russell 2000 Volatility Index (ticker: RVX) measures the expected 30-day volatility in the Russell 2000 Index. The RVX Index is based on the implied volatility levels originating from options on the Russell 2000 Index and often used as a barometer to short-term bullish and bearish sentiment. For example, the RVX Index at 24, market participants are expecting a price range of +/- 24% within the next 30 days. During periods of market duress, like those seen in 2008 and 2020, the RVX Index has risen to over 80.

Over the past 15 years, the RVX Index during Russell Reconstitution was below its average level at 24.19, currently sitting at less than 20.

Source: FTSE Russell

Source: OCC

Source: OCC

Harvesting Volatility During Russell Reconstitution

FTSE Russell demonstrates its exceptional annual process by implementing the Russell Reconstitution through frequent and transparent communications to the investment community.  With $130 billion in equities trading occurring at market close on “Recon Day,”, the market sentiment leading to this event is typically benign as this massive volume contributes little to market volatility. The relatively low volatility during Russell Reconstitution offers an opportunity to generate yield through option writing strategies and collecting premiums from selling calls and puts. Cboe offers several Strategy Benchmark Indices based on the Russell 2000 Index that include option writing strategies:

  • Russell 2000 BuyWrite (BXR®) – Long underlying Russell 2000 Index and Sell an At-the-Money Call.
  • Russell 2000 30 Delta BuyWrite (BXRD®) – Long underlying Russell 2000 Index and Sell a 30 Delta Out-of-the-Money Call.
  • Russell 2000 PutWrite (PUTR®) – Long U.S. Treasury to fully collateralize Selling an At-the-Money Put.

However, when comparing the RVX Index versus the Cboe Volatility Index (the VIX® Index) U.S. small-cap companies are inherently riskier, carrying a five to six percent risk premium. To highlight opportunities to harvest volatility from option writing strategies, we observed the performances of BXR®, BXRD® and PUTR® during the Russell Reconstitution periods from 2015 to 2023. Over this time,  the Russell 2000 Strategy Benchmark Indices outperformed the underlying Russell 2000 Index on many occasions.

Source: FTSE Russell

Options on the Russell 2000 Index (RUT) and Mini-Russell 2000 Index (MRUT)

As the third most actively traded index market listed exclusively at Cboe, volume in the Russell 2000 Index experienced +30% growth over the past year with an average daily volume of 71,000 or $14 billion notional during Q1 2024. Since the launch in 2022, volume in the Mini-Russell 2000 Index — which has a notional value of 1/10th or $20,000 of the Russell 2000 Index, — has grown by more than 50% with an average daily volume of 400, $8 million notional, in Q1 2024. 

Earlier this year, Cboe added Tuesday and Thursday into the RUT Weeklys options expiries line-up. With this addition, market participants can trade both RUT® and MRUT on every trading day of the week. As a result, trading activity in same day expiring options (0 DTE) is currently 13% of the total volume in RUT.

Key Takeaways                                                                                      

FTSE Russell’s annual reconstitution effectively rebalances its benchmarks to accurately reflect market changes, as well as highlighting unique characteristics attributed to the U.S. equity market segments. Both retail and institutional market participants have opportunities to benefit from expressing a market view, manage risk or generate income by trading Mini-Russell 2000 Index and Russell 2000 Index options on a timely basis.

Learn more about Russell 2000 Index options and Strategy Benchmark Indices here.

There are important risks associated with transacting in any of the Cboe Company products or any digital assets discussed here. Before engaging in any transactions in those products or digital assets, it is important for market participants to carefully review the disclosures and disclaimers contained at: https://www.cboe.com/us_disclaimers/

These products and digital assets are complex and are suitable only for sophisticated market participants. In certain jurisdictions, including the United Kingdom, Cboe Digital products are only permitted for investment professionals, certified sophisticated investors, or high net worth corporations and associations.

These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position.

Market participants should put at risk only funds that they can afford to lose without affecting their lifestyle.