Get Ready For One Of The Biggest Index Rebalances Of The Year

By Spencer Israel

One of Wall Street’s biggest annual shakeups is upon us.

Each June, FTSE Russell, one of the largest index providers in the world, rebalances its Russell U.S. indexes, adding and removing stocks based on changes in market cap over the previous 12 months.

Approximately $9 trillion—or 67 percent of actively managed institutional U.S. equity assets—is benchmarked to these indexes, most notably the large-cap Russell 1000 and small-cap Russell 2000 indexes. In the aggregate, Russell indexes represent about 98 percent of the total investable U.S. equity market.

A result of this yearly rebalancing is that the funds that track these indexes are compelled to adjust their portfolios accordingly. This adjustment triggers increased buying pressure among the stocks being added, and increased selling pressure within the stocks being removed. In other words, these adjustments can be felt throughout Wall Street.

In an effort to minimize volatility and give managers time to adjust their portfolios, FTSE spreads the rebalancing process out over the course of a few weeks, beginning on May 10th when they determined the market cap eligibility for companies to be included in their indexes. The preliminary add and delete lists were posted on June 7th on the FTSE site. Here’s the remaining timeline.

June 14 & 21 – U.S. index add & delete lists are updated after 6 pm.

June 28 – Russell Reconstitution is final after the close of the U.S. equity markets.

July 1 – Equity markets open with the newly reconstituted Russell U.S. Indexes.

It’s not uncommon for stocks to react immediately once the preliminary add and delete lists are posted, as this will be the first time the market gets an inclination of who’s being added and removed from the indexes. It’s possible that the stocks on this list will gap up or down before Monday’s open.

Although being added or removed from an index is a big deal for a stock, as it means they’ve reached or fallen below a certain market cap, it’s not necessarily a guarantee that it will move accordingly. As this trade has become popularized and more traders have recognized its reliability, it’s no longer a given that stocks being added will move higher and stocks being deleted will move lower. (It’s even possible that if the trade gets too crowded on one side, the adds can trade down and the deletes can trade up).

In addition to the unpredictability of the equity being added or removed, volatility can also spread to funds that track these indexes. For example, the iShares Russell 1000 Growth ETF (IWF), the largest such ETF in terms of assets, will see spikes of anywhere from 3-6x its average volume on the days the U.S. add and delete lists are updated.

On the approach to the actual reconstruction, the managers of these funds buy and sell their holdings accordingly as close as possible to the market close on June 28th or market open on July 1st. This can lead to added movement within the last hour of trading on these days, as large orders will be placed to get ahead of the change.

The author holds no positions in any of the ticker symbols mentioned.

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