FLASH FRIDAY:  A New Twist on the Russell Rebalance

Would you like a twist with that?

That is often the refrain of bartenders when serving an alcoholic beverage – but today’s Russell Rebalance is serving one up as well. And it is very different than the same event five years ago when a company named Google was included.

The day of a rebalance event is often one of the busiest trading days of the year and today proves no different.

To refresh, the annual reconstitution ensures that the Russell US Indexes are recast to reflect changes in the US equity markets over the preceding year in accordance with the transparent, public, rules-based methodology. During the multi-week rebalancing process, concluding today, changes in market capitalization, sector composition, company rankings, and style orientation are captured to be reflected in the new index composition and allows the different indices to remain representative of the benchmarks they are targeting.

So, what is this quarter’s twist? Or should it be twists?

This year’s Russell Reconstitution concludes at the close of US equity markets on June 26, 2020. The Russell US size index memberships will be reset, as will the Growth and Value Style indexes along with the Defensive and Dynamic Stability indexes. All eyes will be on the Russell US Indexes once again and we are looking forward to an orderly process and, perhaps, an all-time record for market volume, according to Catherine Yoshimoto, Director, Product Management, Russell.

She told Traders Magazine that this year upwards of 143 projected additions and 205 projected deletions were going to occur for the Russell Indexes.

“That’s one way this quarter is different,” she said.

But wait, there’s more.

Second, the total US equity market capitalization, as reflected by the Russell 3000 Index, is down 1%, yet the market cap of the 10 largest US stocks is up more than 23% as compared to the 2019 reconstitution.

Thirdly, while overall capitalization for the US equity market stayed relatively flat this year, there was a notable divergence between the large- and small-end of the US equity market, driven by the relative strength of US large-caps over the past year.

Lastly, the market cap breakpoint separating small-caps (Russell 2000 Index) and large-caps (Russell 1000 Index) decreased by more than 16%, and the smallest US company falls below $100 million for first time since 2009.

Credit Suisse noted the uniqueness of this year’s rebalance and estimated that the 2020 FTSE Russell changes will generate almost $100 billion of index trading, more than double the roughly $40 billion that indexers were expected to trade for the S&Ps quarterly rebalance this last Friday.

Phil MacKintosh, Chief Economist at Nasdaq, noted that although this spike in volume slows the exchanges matching engines down a little, last year Nasdaq processed closes for all 2,765 Nasdaq-listed stocks, representing $43 billion across 1.3 billion shares and more than 1.1 million orders in just over one second.

“This year we’re expecting to see an even larger 1.5 billion shares from indexers in the close,” MacKintosh said.

Nick Kalivas, senior equity ETF strategist at Invesco added: “The Russell Reconstitution is going to completely realign the stocks going into ETFs based on the Russell US Indexes.

“So, this is significant for an ETF issuer on two levels; the size factor is important as well as the shuffling of the deck with stocks flowing in and out of the factor indexes as they move from growth to value or value to growth, for example,” Kalivas said.

The following article originally appeared in the June 2015 Edition of Traders Magazine

June Russell Reconstitution Larger Than Previous, More Google Shares Included

By John D’Antona Jr.

The yearly reconstitution of the Russell Index is usually good for a few extra hours of work and a few simple trades, but this year’s event could be noteworthy.

Agency-only broker ITG noted that the 2015 event is noteworthy for both its size (at a projected $32B buy/sell, it is larger than the last few Reconstitutions) as well as Russell’s decision to include multiple share classes for single companies based on size. This decision was largely a response to Google’s issuance of non-voting “C” shares last year. As a result we will see several major additions to the Russell 1000 including CMCSK, FOX, VIA, BF/A, NWS and ,LEN/B (according to ITG projections).

The 2015 reconstitution event results will be announced after the market close on Friday, June 12th, with the rebalance trade occurring at the close of trading on Friday, June 26th.

The annual reconstitution impacts all investors, not just indexers, ITG director of index research Chad Dale said, as approximately $32 billion to buy and sell at the close on the 26th (according to ITG’s projections), it is important to stay aware of all index flows to make sure that investors and traders are not caught off guard by sizable indexer-driven movement in prices & volumes.

“Long-only investors, hedge funds, and quantitative investors should know how the trade will impact their holdings, and be ready to respond to potential liquidity changes in names of interest,” Dale said.

Additionally, changes to domicile (Russell’s determination of what country a company truly represents) will result in several changes to the Russell 1000 including the addition of DLPH, ESV, KING, NE, and the deletion of QSR, according to our projections.

The reconstitution impacts a large universe of securities – approximately 3,150 companies.

Dale said that after reviewing the event data based off close of business data from May 8, ITG projected that it expected the list of potential additions/deletes will change before the ranking due to market movements, corporate actions, or changes to Russell’s methodology for this year’s reconstitution.

Preliminary Index lists will be released by Russell after COB Friday, June 12th, 2015, with additional updates released COB Friday, June 19th.

“We project approximately $32 billion turnover (single-sided) in this year’s reconstitution,” Dale said. “Russell 3000 turnover is expected at 3.1% vs. 3.2% in the Russell 1000, and 10.7% in the Russell 2000.”

He added that ITG currently projects 13 additions and 1 deletion in the Russell 1000 index. It also currently projects 112 additions and 146 deletions from the Russell 2000 index.

Furthermore,25 securities are currently expected to migrate from the Russell 2000 to Russell 1000 index. Forty-four companies are expected to migrate from the Russell 1000 to Russell 2000.

Lastly, revisions to Russell’s 2015 Methodology altered the rules concerning the inclusion of secondary share classes, as a result several new securities are expected to join the Russell 1000 and 2000 index.