- By Michael Sokoll / AVP, Nasdaq Market Intelligence Desk
At this time of year there is lots of discussion about the “Russell Rebalance” or as FTSE Russell, the owner of the index family officially calls it, the Russell Reconstitution. Why does this matter and why should small cap companies care about it?
It starts with the fact that approximately $9 trillion is benchmarked to the Russell U.S. Indexes and $1 trillion is indexed directly to Russell U.S. indexes. This means that Index funds and ETFs that track the Russell 1000, 2000, 3000 and Microcap indexes will buy and sell securities based on whether or not they are included.
Companies that are added to, deleted from or simply remain in one of the Russell 3000 indexes should expect to see higher than normal volumes this June 28. This is because index funds conform to new index weights that are effective after the close on that day. Most of the related trading will take place at the end of the day. For most companies, it will be a pretty “normal” day until about 4:00 p.m. EDT. Then, many issuers will see block trades in their stock at the bell and afterwards. It can seem very unusual if you are not expecting it.
Each June FTSE Russell rebalances its U.S. indexes during its annual reconstitution to accurately weight the 4,000 largest companies in the U.S. stock market by market capitalization. The reconstitution is usually one of the most highly‐anticipated and heaviest trading days in the U.S. equity markets.
With the significant sums following these indexes, impacts to companies by index-related transactions can be large. Many companies can see a multiple of a normal day’s trading volume trade in the Nasdaq Closing Crosstm and in “after-hours” trading on the reconstitution day – this year slated for June 28, 2019.
In fact, about a quarter of stocks are expected to trade more than their average daily volume in the Nasdaq Closing Cross™ alone on June 28, and some will trade an entire week’s volume on “Russell Friday”. This is particularly true for Russell 2000 additions and deletions. Criteria for inclusion in the various Russell indexes is summarized below.
Each May on “Rank Day” (May 10th this year), FTSE Russell calculates the total market capitalization of U.S. common stocks and ranks them from largest to smallest. The largest 4,000 companies that satisfy all of Russell's eligibility requirements become members of the Russell indexes.
Composition of the Russell 3000 and Microcap Indexes are as follows:
- The Russell 3000 Index consists of the largest 3,000 U.S. companies by market cap rank. A company in the Russell 3000 is also by definition included in either the Russell 1000 or Russell 2000 Indexes.
- The Russell 1000 is comprised of the first 1,000 qualified companies in the Russell 3000 and represents the largest U.S. companies.
- The Russell 2000 is comprised of the 2,000 smallest companies within the Russell 3000 and is generally viewed as the benchmark index for small‐cap companies.
- The Russell Microcap Index includes the smallest 1,000 securities in the Russell 2000/3000 plus the next 1,000 securities, subject to a minimum market capitalization of $30 million.
Other Things to Note
The minimum market cap to be added to the Russell 2000/3000 was $152.9 million this year. Last year it was $159.2 million. The high was $262 million in 2007 but by 2009 following the financial crisis the minimum dropped to $78.3 million.
Stocks below $1, ADRs, preferred stocks, closed end funds, REITs, and Limited Liability companies are among the securities excluded from the Russell’s U.S. indexes.
After membership is determined the shares of the securities are adjusted to include only those shares available to the public or otherwise referred to as "float." Stocks are subsequently weighted in the Russell U.S. indexes by their available float‐adjusted market capitalization.
Outside of IPOs, Russell does not replace companies throughout the year due to M&A and other removals – so there can be less than 2,000 companies in the Russell 2000 during the year. Russell began adding IPO companies on a quarterly basis in 2004.
Also, in 2017 Russell added a requirement that a minimum of 5% of a company’s voting rights need to be owned by unrestricted shareholders for a company to be added for the first time. Existing companies were grandfathered until 2022.
It’s estimated there will be 179 additions and 123 removals from the Russell 3000 in 2019.
The large cap Russell 1000 accounts for 90% of the market cap of the Russell 3000 and the Russell 2000 accounts for the remaining 8%. This has stayed consistent across time.
Most of the index dollars tracking the Russell indexes are in the Russell 3000 family. For example, the iShares Russell 2000 ETF (IWM) is one product that follows that index. It has $41 billion in assets. Its microcap cousin, the iShares Microcap ETF (IWC), has $850 million in assets.
FTSE Russell has a dedicated 2019 Russell Reconstitution web page located here. You can find a calendar of events, preliminary additions and deletions lists, historical market cap cutoffs, and even sample press releases to announce Russell additions to the Russell indexes.
For Russell-related trading questions, contact the Nasdaq Market Intelligence Desk (MID) Market.IntelligenceDesk@nasdaq.com.
Michael Sokoll, CFA is an Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 30 years of equity market experience. In this role, he provides Nasdaq-listed companies with real-time trading analysis and objective market information.
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding sector and strategy performance are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.