- The update covers a range of Russell indexes, such as the Russell 1000 large-cap index and the Russell 2000 small-cap index, which together make up the Russell 3000 index.
- Stocks that benefit from AI, such as Nvidia, are up 180 percent from last year as of Monday, while AMD shares are up more than 230 percent.
OUR TAKE
The Russell Index restructuring plays a key role in ensuring consistency, transparency, and reliability of U.S. stock market indicators for global investors. The annual adjustment of index components is one of the most important drivers of short-term changes in supply and demand in the U.S. stock market, often resulting in a large price change for a particular company or industry sector.
–Zora Lin, BTW reporter
What happened
Investors are bracing for a final shake-up of the FTSE Russell benchmark index on Friday, with the wild run-up in AI-related stocks over the past year expected to have a huge impact on their final shape. The Russell restructuring will take effect after the close of trading on Friday.
Since last year’s restructuring, the runaway rise of stocks seen as likely to benefit from AI, such as Nvidia and Super Micro Computer, is expected to have a significant impact on the Russell’s growth and value index this year.
The update covers a range of Russell indexes, such as the Russell 1000 large-cap index and the Russell 2000 small-cap index, which together make up the Russell 3000 index. This once-a-year change prompts fund managers to adjust their portfolios to reflect the new weights and components.
Steven DeSanctis, equity strategist at Jefferies in New York, says the outperformance of growth stocks means there will be fewer than 400 growth stocks in the Russell 1000, and he estimates the weighting of the top five growth stocks will be more than 44 per cent.
In addition, the weighting of the Russell 2000 will change, with DeSanctis expecting a 4.6% drop in technology stocks and a 3.4% rise in health care stocks. Bryant vancronkite, senior portfolio manager at Allspring Global Investments, said about two-thirds of the Russell 1000 is made up of technology and communications services.
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Why it’s important
The Russell Index is a weighted average of market capitalization issued by Frank Russell of Washington State and is one of the best measures of the stock price performance of small companies. It is a widely followed index that tracks large-cap and small-cap stocks in the U.S. market, and its constituents must be U.S. companies, covering 63 countries and 22 territories around the world.
“We are there as an index provider to reflect the market. That’s what we’ve been hearing from our clients that they want, “said Catherine Yoshimoto, director of product management for FTSE Russell U.S. Indices.
The reason for restructuring and rebalancing is the change and development of the market. The annual restructuring ensures that the Russell Index represents changes in the U.S. stock market over the previous year in a transparent, open, rules-based manner. Restructuring poses risks for investors who follow the Russell index to ensure that losses are minimized against the benchmark. Similarly, a correction would create opportunities for investors seeking to take advantage of the price volatility that might result from an index restructuring.
“In theory, the increased concentration resulting from rebalancing will put buying pressure on these stocks, but in practice the portfolio diversification rules should mitigate this impact,” UBS analysts said in a note to clients. They point out that this will increase tracking error for growth managers.
