By: Wes Wynn, Director, Benchmark Products and Catherine Yoshimoto, Sr. Index Product Manager
To say a lot has happened in the US equity markets since the last Russell indexes reconstitution in June 2015 would be an understatement. Oil prices have continued their dramatic slide, the US Fed raised interest rates for the first time in nearly a decade, and China’s economic slowdown has shaken investor confidence.
But, when such significant market events impact stock prices, often certain stocks and sectors are more affected than others. This underscores the importance of our upcoming 2016 Russell reconstitution, an annual process by which all Russell indexes are completely rebuilt ensure full representation of US equity market segments.
For the most comprehensive view of how US equity markets have shifted since last June, we’ve looked at the Russell 3000E™ Index (R3E), which includes the largest 4,000 US companies and is our broadest representation of the US equity markets. Sub-indexes in the R3E are broken out by market capitalization and style. Today, with $6.3 trillion in benchmarked assets tracking the Russell US Indexes, the annual reconstitution event is watched closely by many market participants globally.
From June 30, 2015 through the end of February 2016, the R3E returned –7.04%. While there was downward pressure on US equities in general over this 8-month period, some ICB industries were affected more than others. As shown below, Oil & Gas not surprisingly lagged the other industries, followed by Basic Materials and Health Care. On the other end of the spectrum, Utilities, Telecommunications and Consumer Goods industries delivered positive returns over the 8-month period ended February 29, 2016.
Russell 3000E Index - ICB Industry PerformanceSource: FTSE Russell, data as at February 29, 2016. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
This resulted in an uneven range of changes in constituent market capitalizations. As stocks in the broad index have seen their market caps shrink or expand considerably, their place above or below the dividing line between large cap and small cap equities could also shift. Some could even fall below the threshold for R3E eligibility.
The dividing line between the US large cap Russell 1000® Index (R1) and small cap Russell 2000® Index (R2) is of particular interest to the market as a gauge of market growth. As you can see in the chart below, in 1984, the market capitalization of the company at the threshold of the R1 and R2 was a mere $256.6 million; by 2015, the reconstitution market cap break had increased to $3.4 billion. At the top of the cap spectrum, the largest security in the R1 was only $64.6 billion in 1984, compared to $750.5 billion in 2015. Even the smallest company included in the R2 had grown from $21 million in 1984 to $177 million in 2015.
Reconstitution: Critical to reflecting ever-changing markets
Source: FTSE Russell, data as at June 30, 2015.
As we’ve observed since the last Russell recon, companies may get larger or smaller over time, or periodically undergo changes in their style characteristics. As changing markets continue to reshape the US equity landscape, reconstitution ensures that companies continue to be correctly represented in the appropriate index.
So is the annual Russell indexes reconstitution doing its job? Our extensive research confirms that it indeed results in an accurate representation of the capitalization segments, and minimizes the turnover required to reflect the segments as they change. Our process of adding IPOs quarterly and making daily and monthly adjustments reinforces this balance.
The chart below illustrates the timeline for the 2016 Russell indexes reconstitution.
Source: FTSE Russell, as at March 1, 2016.
Please refer to our website for more information and resources on our annual Russell reconstitution.
 For additional information on the Russell 3000E Index methodology, see http://www.ftse.com/products/downloads/Russell-US-indexes.pdf?962
 Source: FTSE Russell, data as at June 30, 2015.
[3 ]Industry Classification Benchmark is a widely recognized classification system created by FTSE, categorizing individual companies into subsectors within the overall economy in order to facilitate comparisons. It is used by NYSE, NASDAQ and other major markets around the world.
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