Trader Talk

It's Time For The Russell Reconstitution


Big volume coming: it's time for the Russell reconstitution, and this one will be large. Every year at the end of June, the Russell reconstitute their series of indices.

On the surface, it's pretty simple: on June 26, the Russell organization will rank the top 4,000 stocks in the U.S. by market capitalization. They will then slice and dice them by size as well as investment style.

A preliminary list was released by the Russell Investment Group over the weekend; an update will be issued this Friday, and the final list will come out after the close on June 26th.

This is no small matter: there is about $4.4 trillion tracking the roughly 25 Russell indices. Professionals who are actively or passively indexed to the Russell indices will need to buy or sell stocks in proportion to their new weighting.

In the last year, price swings have been so great that there is likely to be very heavy volume, particularly among small caps.

The most important of the different Russell indices is the Russell 1000 (the largest 1,000 stocks by market capitalization) and the Russell 2000 (the next largest 2,000, usually considered a small cap index).

Several important points:

1) market capitalization is down DRAMATICALLY compared to a year ago. According to JP Morgan, the cutoff for inclusion into the Russell 1000 this year will be about $1.2 billion, last year it was $2.01 billion! The cutoff for inclusion into the Russell 2000 will be about $70 million; last year it was $167 million!

2) while a small number of stocks (45) will be going into the Russell 1000 from the Russell 2000, and vice-versa (43 coming out), some of the biggest volumes will occur between small stocks that are going into the Russell 2000 for the first time (274).

For example, Northeast Community Bancorp, a small New York-based bank, will be going into the Russell 2000; those indexed to the Russell 2000 will need to buy 500,000 shares. Doesn't sound like much, but that is 1,213 days of normal daily volume!

Another example: Ohio Value Bancorp is also going into the Russell 2000; indexers will need to buy 339,000 shares, that's 1,130 days of normal volume!

3) there will also be significant movement between styles (growth vs. value), and among sectors (financials, health care, industrials, etc.).

For example, due to price declines the Industrials and Technology sectors will show a DECREASE in their weighting in the Russell 1000, while the Russell 2000 will see an INCREASE.

Does this alter fundamentals at all? No, it's an entirely synthetic event. But in a low-volume month, it will be a big-volume event.



Questions?  Comments?