What Russell index rebalancing means for the stock market


It is so-called Russell rebalancing day. That is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to composition of its indexes, to ensure that changes in market value or investment styles, like shares of companies deemed value or growth, for example, are properly accounted.

The combination of the Russell 1000 RUI, +0.20% and Russell 2000 RUT, +0.73% indexes represents about 98% of the investible U.S. equity markets, also captured in the Russell 3000 RUA, +0.24% with the rebalancing, set to occur at end of day Friday, intended to refresh the equity landscape for the next year in a year marked by record-setting moves for U.S. equities.


Mat Lystra, senior research analyst, FTSE Russell Indexes, told MarketWatch that moves in financials and energy shares over the past year will represent the most notable alterations in the Russell indexes, which will offer investors a chance to reassess their own portfolio makeup amid sizable moves in those sectors, much of which occurred in the wake of Donald Trumps surprise presidential election victory on Nov. 8.

Indeed, the Russell 1000 RGS Energy Index R1RGSENG, +0.90% is down 15.2% since the start of 2017 and down 9% since last June, compared with the Russell 1000 Financial Services Index R1RGSFS, -0.09% which is up 5% since the start of the year and 21% since last June, according to FactSet data.


Lystra said much of this years reconfiguration also has been shaped by the Trump bump, or the rally in sectors and stocks tied to Trumps campaign promises around Wall Street deregulation, tax cuts and a boost to infrastructure spending (see table below).

Index June 26, 2016June 12, 2017 June 26, 2016Nov. 8, 2016 Nov. 9, 2016June 12, 2017
Russell 1000 index 21.7% 5.8% 15.1%
Russell 2000 index 27.6% 6.6% 19.7%
Source: FTSE Russell as of June 12, 2017

In total, nearly 200 companies will be added to the Russell 3000 this year; 115 from the Russell Microcap Index RUMIC, +0.96% while about 80 are new entrants to the index, including those from recent initial public offerings.


Looking ahead, lofty valuations as stock benchmarks, including the Dow Jones Industrial DJIA, -0.01% S&P 500 index SPX, +0.16% and Nasdaq Composite Index COMP, +0.46% and the small-cap heavy Russell 2000 trade at or near all-time highs, could influence future Russell moves. Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year.


Technology has been the main driver of these gains, rallying nearly 40% since last reconstitution, though the tech sector has cooled its jets recently, following a downturn begun June 9.

So-called value stocks, which trade at a relative discount to peers based on measures like price-to-earnings, have lagged behind growth names, or shares of companies that increased in value at a faster-than-average rate. But those value names, including financials, energy companies and retailers, could garner more traction if Trumps policy pledges are enacted.

So far, however, growth has outstripped value at nearly every turn, driven by gains in tech shares. The Russell 2000 Growth index RUO, +0.83% is up 1.8% this week, while the comparable value gauge RUJ, +0.63% is down 1% on the week. Year-to-date value is up 10%, while value is down 1.4%.


Check out: Top Strategist Very Positive on Growth Over Value Now: 5 Stocks to Buy

The impact of Russell rebalance is likely to be felt in the final fleeting seconds, or fractions of seconds, as the market closes Friday, and as funds that track the Russell change their composition to reflect the rebalancing, which takes hold on Monday.

However, trading historically on rebalance days has recently been surprisingly smooth, notes Ron Bundy, CEO of FTSE Russell, citing changes to market structure that have taken the noise of trade, allowing market participants to settle orders at a single price at the close, for example.