The set of FTSE Russell indexes—known most for measuring performance of large cap, small cap, value, and growth segments of the market—are rebalanced every year and for most investors it’s a non-event.
If they take interest, it is mainly to see which stocks may gain or lose in terms of cash flows because they were added or dropped from a particular index. (This year GameStop is graduating to the large-cap Russell 1000 index, but AMC isn’t, for example).
But for financial advisors who spend time on portfolio construction and need to benchmark their asset allocation decisions using these indexes, this year’s reconstitution could be a game changer. That’s mainly because market caps have grown so significantly in the past year.
In fact, all advisors, even those who use model portfolios, should make sure they are conversant in these seismic market shifts:
- The total U.S. stock market is much bigger.If you used $30 trillion as a rounding number, you’re now off by almost $20 trillion. According to Russell, the total U.S. equity market capitalization increased by 52% to nearly $48 trillion, as of May 2021. That’s up from $31 trillion in 2020.
- Large cap stocks are much larger (so are small-cap stocks).If you think $1 billion in market cap makes a large-cap, you’re off by a few billion. As of this year, the market cap breakpoint separating the small-caps in the Russell 2000 Index and the large-caps in the Russell 1000 Index increased to $5.2 billion. That’s up from $3.0 billion in 2020—a massive 73% jump. Another sign of the times: The smallest company in the index is Velocity Financial with a market cap of $257 million. Last year’s smallest, Limestone Bancorp, had a market cap of $95 million.
- Even megacap stocks are bigger than you might think.$200 billion in market cap doesn’t really constitute a megacap anymore. There are now four companies with more than a $1 trillion market cap. This year Alphabet joined Microsoft,Apple and Amazon,which reached the trillion mark in 2020.
- Yes, value really is outperforming growth.But it’s more pronounced among smaller companies, according to Russell. The 2000 Value Index returned 79% compared to 50% for the Russell 2000 Growth through May. Looking just at large caps, the Russell 1000 Value had a total return of 44% versus the Russell 1000 Growth at 40%.
- Sectors are shifting.For the large-cap Russell 1000, the sector shifts are relatively minor. Technology and consumer discretionary weights increased modestly. For the Russell 2000 Index, the most notable increase is in health care, while consumer discretionary decreased. Of the 43 IPOs added to the Russell 3000, about half are health care companies.
Advisors who invest using passive index investing products (direct indexing is growing in popularity) should note changes to the index composition, as well as advisors who use indexes to benchmark success of active managers.
“You need to make sure indexes are truly representative” of market segments, says Hilary Keitel, head of U.S. Wealth for FTSE Russell. “This allows financial advisors to fulfill a more precise asset allocation.”
Russell spreads out the reconstitution over a month so broad market impact is limited. The first official Russell index lists were announced June 4. Indexes are scheduled for their 2021 reconstitution after the market closes on June 25. All additions and deletions are on the FTSE Russell website.
Changes will impact more than $10.6 trillion in investor assets. “We anticipate this to be one of the largest trading days of the year in the U.S. markets,” says Catherine Yoshimoto, director of product management at FTSE Russell. “ETF product issuers keep a close eye on this,” she says. They aren’t the only ones.