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Russell indexes reconstitution 2016: The incredible shrinking market

By: Layla Hirschfelt, Sr. Product Manager

Reconstitution day for the Russell US indexes, like Thanksgiving, occurs every year around the same time—the last Friday in June. On this day instead of passing turkey around the table, the Russell US indexes pass around their underlying constituents in a process of  rebalancing. By analyzing some of the underlying factors that go into the year’s rebalancing, a theme will typically emerge. For 2016 the theme was “The Incredible Shrinking Market,” highlighting changes that underscore the importance of this annual process. 

The reconstitution process is crucial to ensuring that the Russell US indexes reflect the current state of the equity markets. During any given year, there can be significant changes in size, sector and style among the equities included in the indexes. These changes dictate the composition of each index for the upcoming year.

The 2016 analysis revealed a drop of 5% in total market capitalization of the constituents of the Russell 3000 Index, representing the US equity market, since the 2015 rebalance. And for the first time since 2012, the small cap/large cap breakpoint declined—falling nearly 15% to $2.9 billion in 2016. We can see the contrast between the 2015 and 2016 market cap ranges and breakpoints below. These changes will impact the index membership and weighting of the constituents of the core market cap weighted indexes—the Russell 3000, the Russell 2000 and the Russell 1000.

Russell 3000 Market Cap Range in 2015 and 2016

Source: FTSE Russell, 2016 data as of May 27, 2016 and 2015 data as of May 29, 2015.

Of particular interest, the 2016 rebalancing revealed that while the total market cap of the Russell 3000 constituents dropped, the ten largest companies by market cap were not the culprits. In the chart below, we can see that eight of the ten largest companies by market cap actually increased in size since last year. Reconstitution will reflect this growth in the weighting distribution within the Russell 3000 and Russell 1000. In the shrinking market, the ten largest companies by market cap will see increased weighting in the indexes.

Ten Largest Companies by Total Market Cap in the Russell 3000 for 2016 ($B)

Source:  FTSE Russell, 2016 data as of May 27, 2016 and 2015 data as of May 29, 2015.

Regarding the decrease in the total market cap of the Russell 3000 constituents and the decline in the breakpoint between large and small cap, without the annual reconstitution process the indexes would organically float away from providing an accurate reflection of the market segments they are designed to measure. With trillions of dollars of assets relying on these indexes as benchmarks to measure active manager performance or as the basis for passively managed investment vehicles, it is absolutely crucial that the indexes reflect current market conditions.

 

You can read additional background on how the annual reconstitution works as well as the outcome of the 2016 reconstitution on our website.

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