What Small-Caps Should Know about the Russell Rebalance
At this time of year, there is extensive 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 about $1.0 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 about $90 billion worth of securities based on whether or not they are included.
Summary:
At the end of every June, FTSE Russell rebalances its U.S. indexes during its annual reconstitution to accurately weigh the 4,000 largest companies in the U.S. stock market by market capitalization. The reconstitution is typically one of the most highly anticipated and heaviest trading days in the U.S. equity markets. This year, 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 on June 26.
With the significant amount of capital following these indexes, many companies can see a multiple of a normal day’s trading volume trade in the Nasdaq Closing Cross and in “after-hours” trading on the reconstitution day.
In fact, more than one-third of Nasdaq-listed stocks are expected to trade more than their average daily volume in the Nasdaq Closing Cross on June 26, 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 are summarized below.
Russell Criteria:
Each May on “Rank Day” (May 8th 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 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 is expected to be about $96 million this year compared to $152.3 million in 2019 and $159.2 million in 2018. The high threshold was $262 million in 2007. By 2009, the minimum dropped to $78.3 million following the financial crisis.
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 will be grandfathered until 2022.
It’s estimated there will be about 200 additions and 150 removals from the Russell 3000 in 2020. About 80 companies will move between the Russell 1000 and 2000 indexes.
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.
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% (Russell indexes cover about 98% of the investable universe of stocks). 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 roughly $38 billion in assets. By comparison, its microcap cousin, the iShares Microcap ETF (IWC), has $714 million in assets.
FTSE Russell has a dedicated 2020 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.
Questions:
For Russell-related trading questions, contact the Nasdaq Market Intelligence Desk (MID) Market.IntelligenceDesk@nasdaq.com.
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.
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