What to Expect from the 2018 Russell Rebalance Trades

Traders Magazine Online News, June 7, 2018

Ivan Cajic

Friday, June 22, will be one of the biggest – and busiest – trading days in the U.S. equity market, with turnover expected in the $300 to $400 billion range, as investment managers adjust their portfolios in accordance with the Russell Reconstitution, the annual change in the benchmark FTSE Russell investment indices. The large-cap Russell 1000, small/midcap Russell 2000 and broad Russell 3000 are among the most widely followed U.S. indices, with an estimated $1.2 trillion in assets tracking the benchmarks.

We project that this year’s reconstitution will lead to approximately $30 billion in net turnover, higher than last year’s $23 billion in turnover. 

Some highlights of this year’s trade:

• We are projecting 290 constituent changes to the Russell 3000 (excluding migrations)
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• There are 7 projected additions to the Russell 1000 index, including Spotify (SPOT), AXA Equitable (EQH) and the second share class of CBS (CBS.A). There are also 2 likely deletions from the index, Ingersoll Rand (IR) and Delphi Technologies (DLPH)
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• There are 164 projected additions to the Russell 2000 index including Zscaler (ZS) and Avaya (AVYA). 
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• 39 companies are expected to migrate from the Russell 1000 to the Russell 2000 and 43 companies will migrate from the Russell 2000 to the Russell 1000
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• The largest sector inflows are expected into Healthcare (net $1.8 bln to buy across adds and deletes), where we anticipate 66 additions to Russell 2000 (40% of all Russell 2000 additions) along with 32 deletions
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• Some of the biggest expected trades include Spotify ($519m to buy), Jazz Pharma (JAZZ, $375m to buy), Ingersoll-Rand ($692m to sell) and Ensco (ESV, $293m to sell)
     

Depending on index membership, we estimate that firms benchmarked to Russell indexes own more than 10% of the total float shares outstanding in some of these names. As a result, additions or deletions from the index can generate significant price impact and create a substantial liquidity event. These liquidity events make the Russell Reconstitution a noteworthy occurrence even for many traders who are not benchmarked to the indices.

While a substantial portion of the trading takes place into and at the close on rebalance day (June 22), we would expect trading activity to rise in the weeks ahead of the Russell, particularly as traders reposition themselves ahead of the S&P and FTSE index rebalances on June 15. 

 

Ivan Cajic is Head of Index Research, ITG

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