The Russell indices are some of the most widely followed for investment managers and indexed funds. In 2022, Russell reconstitution day was the highest-volume trading day of the entire year, generating $143 billion in trading volume in the closing minutes of trading on June 27, 2022. With roughly $12.1 trillion benchmarked to the Russell US Equity Indices, the Russell Rebalance seeks to maintain an accurate market representation through their family of Russell US Indices as the size and composition of the US equity market constantly changes. More popularly, the largest 1,000 companies form the Russell 1000 Index (large cap), while companies 1,001 to 3,000 make up the Russell 2000 Index (small cap).
How the Rebalance Works
April is “ranking” month when the largest US companies are ranked by market capitalization. In 2023, the rank day fell on Friday, April 28. May was the month that the preliminary reconstitution portfolio began to be communicated to the marketplace. On May 19, preliminary lists were communicated to the marketplace and updates were provided on May 26, June 2, June 9, and June 16, with the last update set to occur on June 23. The newly reconstituted indices take effect after the market closes on June 23.
It is important to note that they do not disclose where a company falls within those three indices until after the rebalance occurs. While Russell does not disclose this data, most sell-side and hedge fund managers feverishly perform these calculations and look to capitalize on these movements heading into the June 23 rebalance.
Performance Since Last Russell Rebalance
Since the 2022 rebalance through yesterday’s close (6/21/23), we have seen the Russell 1000 (+11.49%) and Russell 2000 (+5.15%) appreciate, but that’s not to say there haven’t been worrisome headwinds. Given the latter’s performance, we can see a bearishness among smaller cap names, partly due to an overarching theme of interest rate hikes making access to capital more expensive, along with the failure of Signature Bank and SVB hitting small banks and smaller tech firms much harder than it did large banks and large tech firms.
Despite all of this, overall market sentiment appears to have started leaning bullishly, with the market’s fear gauge (the VIX) nearing low levels only seen before the pandemic (since the ’08 crash, the VIX has closed as high as 82.69 on March 16, 2020, and as low as 9.14 on November 3, 2017). As of last Friday (June 16, 2023), the S&P 500 has also closed higher for the fifth consecutive week, amplified by a breakout in NYSE’s Cumulative Advance-Decline line which measures the number of individual stocks participating in a market trend. This helps to contradict recent commentary that the year-to-date rally was driven solely by seven mega-cap tech stocks.
The Russell Rebalance and Stock Prices
It is difficult to determine how the Russell Rebalance could impact a stock price. A higher weighting in an index does not necessarily translate to strong buy demand and rise in the stock price. On the contrary, since this is such a large liquidity event for companies it can often attract large sellers looking to reduce their exposure, which could cancel out the index buying. In addition, moving down from the Russell 1000 to the Russell 2000 does not necessarily mean that index investors will be net sellers on the day.
In fact, there are generally more assets tied to the Russell 2000 than the 1000, so index demand could potentially be net positive. Hedge funds can also impact prices by trying to front-run some of the major moves in anticipation of index funds and make short-term profits. In other words, there are several factors that could impact stock prices that make it nearly impossible to predict the price movements as a result of the Russell rebalance.