What Is The Russell Rebalance?


The Russell Indexes’ annual rebalance took effect Friday afternoon, with parent company FTSE adding and removing stocks from their indexes based on changes in market cap over the past year.

The Russell 1000, 2000 and 3000 indexes contain some portion of a total 3,000 stocks that represent a combined 98 percent of the investable U.S. equity market. Countless ETFs and mutual funds mirror the composition of the Russell indexes, so changes will reverberate across Wall Street.

Russell Rebalancing

The Russell 3000 index is a collection of the 3,000 largest public companies incorporated in the U.S. The largest 1,000 of those make up the Russell 1000, while the smallest 2,000 make up the Russell 2000.

The rebalancing process plays out over several weeks, starting on May 11 when FTSE ranked this year’s potential index components. They then disclosed the preliminary results after the bell on June 8 and updated those results each subsequent Friday.

The actual reshuffling was scheduled for June 22 after the market close.

What It Means For Investment Strategy

Because so many funds mirror the Russell indexes, any stock that is added to the indexes, removed, or moved from one to the other typically sees some amount of near-term buying or selling volume as funds readjust their holdings. Funds representing roughly $1.2 trillion are currently tracking the Russell indexes, and IGT estimated there could be between $200 billion and $300 billion in U.S. market turnover on June 22 thanks to the Russell rebalancing.

Because the stocks in the Russell 2000 in particular are small-cap stocks, many of which have relatively small floats, a short-term flood of buying or selling volume can create major trading opportunities. Not every stock being added or deleted from the Russell indexes sees wild trading action, but traders should keep an eye on the dozens of stocks that the Russell is shuffling.

How To Play It

A full list of the preliminary Russell adjustments, including the dozens of stocks that will be impacted, can be found on the Russell website.

Each of the individual names typically experiences volatility immediately after the initial list is released—in this year’s case June 8. And because the list is released after hours, stocks will typically open higher or lower the next day depending on the move.

The volatility can also spread to funds like the iShares Russell 2000 Index (IWM), or any of the hundreds of other funds that track these indexes. It’s up to each fund to make the appropriate buys and sells as close to the rebalance as possible—either before Friday’s close or after Monday’s open. This can lead to added movement within the last hour of trading on rebalancing day as funds place large orders to get ahead of the change.

However, it’s important to understand that over the years this has become one of the most popular trades on Wall Street. It’s not as simple as simply buying the additions and selling the deletions. Proprietary Trader Dennis Dick has seen instances where the trade actually gets too crowded and leads to a reversal.

“Ten years ago it was a slam dunk. You bought the adds and sold the deletes…and it was a slam dunk and everyone would have their best trading days of the year because the ads would all go up and the deletes would all go down,” he said. Nothing is easy anymore because it’s predictable, and trades get crowded when they’re predictable.

“I’ve seen instances where the ads get killed a few minutes before the close and the deletes go up. You’ve gotta just go with the flow on these days. If you see the adds leaking going into the close, it usually gets worse. And if you see them going up, it usually gets better. So go with the trend.”

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