By: Wesley Wynn, director of global and US benchmark products
The annual reconstitution day for the Russell US Indexes is usually a time for reflection. This is the time of year when the Russell US Indexes are rebalanced to ensure accurate representation of the market and its size and style segments. The process of rebalancing often reveals a larger picture of the trends occurring in the market and serves as a reminder as to why this process is so important. As the dust settles around this year’s reconstitution, it appears that the technology sector is fortifying its position among the top constituents in the Russell US Indexes in terms of size based on market cap.
As we can see in the illustration below, the overall size of the market as represented by the Russell 3000® Index grew by nearly 13% since the 2016 reconstitution. In line with this growth, we see that the breakpoint between large cap—those stocks included in the Russell 1000® Index—and small cap stocks—as represented by the Russell 2000® Index—increased by 17%. Of the top 10 largest companies in the Russell 3000, only ExxonMobil decreased in market cap size. And for the first time ever, four of the largest five companies are from the technology sector.
Market cap ranges and breakpoints between US large and small cap, with and without banding
Source: FTSE Russell. * Reflects banding. Data as of May 12, 2017 and May 27, 2016 respectively.
As of rank day, which occurred on May 12, 2017, the top four technology companies now account for 84% of the total market cap of the largest five companies in the Russell 3000 Index. I wanted to examine the evolution of this development in the technology sector, so I took a look back at the top 10 largest companies in the Russell 3000 Index as of reconstitution over the last ten years. As we can see below, technology stocks have been steadily increasing as a percentage of the total market value of the top ten largest companies in the index. Ultimately crossing over to the majority after the 2017 reconstitution, technology companies now represent 53.1% of the total market value of the top ten companies in the Russell 3000.
Percentage of largest 10 companies in the Russell US Indexes by market value represented by technology companies
Source: FTSE Russell. Data as of June 23, 2017.
We can only speculate as to what this trend can tell us about where the market is headed. However, there is no doubt that the technology sector has become a major player in the makeup of the Russell US Indexes. Annual reconstitution allows us to identify these underlying market trends as they emerge. Most importantly, however, the annual rebalancing process ensures that the Russell US Indexes continue to accurately reflect the market.
For more detail on this year's rebalancing, please visit the 2017 Russell Reconstitution Recap on our website.
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