Russell Reconstitution Could Ignite Surge in Trading

Fans of fireworks could get an early 4th of July in the stock market at the end of June. How’s that, you say?

Every year, the Russell index rebalances at the end of June, and the changes made to the large-cap Russell 1000 and the small-cap Russell 2000 can create an increase in trading volume. If you’re unfamiliar with the Russell Index rebalance, we’ll explain how it works and why it could ignite a trading volume surge in June.

According to Russell, they rebalance indexes once a year to account for changes in the stock market over the prior 12 months. Stocks are added to or removed from the indexes based on the rules underlying the stocks held in each index. This year will be the 33rd straight year for the Russell Reconstitution, and they will announce the final add/delete lists after the stock market closes on Friday, June 25.

However, trading activity in the Russell indexes heats up throughout June, as they announce preliminary add/delete lists in the weeks leading up to June 25. The first initial add/delete list was announced on Friday, June 4; that list was updated on June 11 and then again on June 18. They’ll announce the final add/delete list on June 25, and the new indexes will start trading on Monday, June 28.

We believe the Russell Reconstitution is an event significant to the stock market for one simple reason: over $10 trillion in assets invested in index funds tied to the Russell indexes. A large percentage of those trillions are in funds that track the Russell 1000 and Russell 2000.[1] In other words, when the final add/delete lists are announced on June 25, index funds will scurry to update their investments to align with the updated Russell indexes. We believe a lot of money will flood into and out of specific stocks on that Friday.

Consider this: In 2017, approximately five billion shares were traded when the final add/delete lists were announced on June 23.[2] That was the second-busiest day for the stock market that year. In 2020, FTSE Russell reported that $69.9 billion were traded on the NYSE and $56.7 billion were traded on the NASDAQ on the final add/delete day of June 26.[3]

This year should be no different.

According to Russell, the FTSE Russell plans to add 38 new small-cap stocks to the Russell 2000. Not too surprising, 21 of these stocks are classified as healthcare stocks. Five recent IPOs are also anticipated to be added to the Russell 1000. Overall, it’s expected more than 250 stocks will be added to the Russell indexes this June.

Interestingly, there are some rumors that the “meme” stocks that have captured the Reddit crowd’s attention may be added to the Russell 3000 this month. This includes stocks like GameStop (GME), AMC Entertainment (AMC), and Clover Health Investments (CLOV), all of which were driven sky high in 2021 by Reddit investors. We’ll find out on Friday if any of these stocks really did make the grade.

Aside from the hot meme stocks, plenty of well-known, large-cap stocks maintain their leading positions in the Russell 3000. There are currently four stocks with a market cap of more than $1.0 trillion in the index: Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT). Tesla (TSLA) and JPMorgan Chase & Co (JPM) also climbed into the top 10 largest companies in the Russell indexes for the first time, knocking out Walmart (WMT) and Proctor & Gamble (PG). Combined, the top 10 stocks represent a total market cap of $10.9 trillion, representing a 53% year-over-year increase.

Overall, we believe the annual Russell Reconstitution is a major market-moving event. Many day traders may try to capitalize on the surges in trading volume in the coming days. Some may succeed at timing these trades, but others may be burned badly, as there is no real roadmap for how a stock will trade ahead of its addition to or deletion from the Russell indexes.

At Nicollet Investment Management, we are managers of actively managed small- and large-cap portfolios, and we don’t change our investments based on changes to the indexes. We will watch the action and look for opportunities, but seldom do index changes impact our portfolios. We are comfortable in our positions based on analysis and fundamentals.

Generally speaking, it is wise not to be distracted by the day-to-day market-moving events. Staying focused on the long term and sticking to your financial plan will ensure smoother, steadier returns in the weeks, months, and years ahead.

If you would like to know more about how we navigate bumps in trading volume as is expected with the Russell realignment, please give us a call.

Please click here for important disclosures.

[1] https://www.ftserussell.com/press/ftse-russell-begins-33rd-annual-russell-us-indexes-reconstitution

[2] https://www.cnbc.com/2018/06/22/russell-rebalance-will-make-friday-the-years-biggest-stock-volume-day.html

[3] https://www.ftserussell.com/research-insights/russell-reconstitution/reconstitution-frequently-asked-questions