The 32nd Annual Russell Index Reconstitution Explained

Rick Rosenthal
July 16, 2020

FTSE Russell Indexes are reconstituted over a multi-week process in accordance to its benchmark methodology on an annual basis. The reconstitution reflects changes from the preceding year by adding and removing shares of companies to the U.S. Russell Indexes. Approximately 98% of the listed U.S. equity market is represented by the widely followed Russell 3000 Index which includes the subset benchmarks Russell 1000 Index (large-caps) and Russell 2000 Index (small-caps).

The 2020 Russell Reconstitution Process

FTSE Russell evaluates the 10,000 publicly traded U.S. companies and ranks the largest companies to be included within the Russell’s cap-weighted Indexes and subsequently revaluated for investment style indexes. The 8 week process begins in May, with the preliminary Russell U.S. reconstitution portfolio. It is followed by a weekly series of a preliminary list of companies up for consideration to be added to or removed from Russell Indexes. Finally, the largest 3,000 companies become constituents within the Russell 3000 Index and then segmented by market capitalization to either be assigned to the Russell 1000 Index or Russell 2000 Index, within their respective cap-weighted bandings.

Russell 2000 Reconstitution 2020 Key Features:

  • FTSE Russell projects 142 additions and 205 removals
  • The smallest market capitalization company within the Russell 2000 Index is less than $100 million for the first time since 2009
  • Russell 2000 currently includes 2,013 constituents with a market cap ranging from $4.4 billion to $94.8 million, with a weighted average of $1.9 billion
  • Separating small-caps from large-caps, the market capitalization banding for small-caps decreased by more than 16%

Source: FTSE Russell

 Source: FTSE Russell

At the close of trading on June 26, assets benchmarked to the Russell Indexes will be rebalanced as the newly reconstituted indexes go into effect. In 2019, Russell Reconstitution Day saw a record 1.2 billion shares with a notional value of $42.59 billion executed within 1.14 seconds.

Expected 30-day Volatility on Russell 2000 Index & Russell Reconstitution

Given the scope of the Russell Reconstitution-- rebalancing approximately $9 trillion in assets benchmarked to the U.S. Russell Indexes is no small feat. In particular, rebalancing the Russell 2000 Index -- the most widely followed small-cap benchmark -- has the potential to be significantly impactful. The Russell 2000 has approximately $2.4 trillion in assets benchmarked. Since 2008, the reconstitution process has yielded a turnover percentage of approximately 12%, which equates to an average of 235 stocks added to and deleted from the index. This low turnover has minimized the impact of stock pricing and volatility from the date of announcement to Reconstitution Day.

Source: FTSE Russell

Alternatively, the Cboe Russell 2000 Volatility Index (RVX℠), which measures the expected 30-day volatility of Russell 200 Index options, has been relatively subdued during the Russell Reconstitution process. Over the past sixteen years, the impact of the Russell Reconstitution on Russell 2000 Index pricing, from the preliminary announcement dates to the implementation of asset rebalancing, has been minimal. This is particularly evident when looking at the average RVX Index levels for the months of May and June.

Source: Cboe Global Markets

Learn More about Russell Index Options and the FTSE Russell Reconstitution

The information in this blog post is provided for general education and information purposes only. No statements within this blog post should be construed as a recommendation to buy or sell a security [or futures contract, as applicable] or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this blog post is available by contacting Cboe Global Markets at Past Performance is not indicative of future results. [Applicable Cboe, VIX and RVX are registered trademarks of Cboe Exchange, Inc.  

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