June 06, 2024

Composition changes of the Russell Indexes over 40 years:

Reflective of changes in the underlying US economy?

The 40th anniversary of the Russell indices gives us the opportunity to review how the indices have changed over the 40-year period. In this paper we find that the indices closely mirror changes in the underlying US economy, indicating that they are representative of the broader economy.

Key takeaways:

  • Three mature industries (Basic Materials, Energy, and Utilities) have seen a marked reduction in industry weights over the period, mirroring the reduction of their relative importance in the US economy, though the weight of the Energy sector increased (from a small base) post the Shale oil revolution
  • Two industries driven by innovation, Health Care and Technology, have seen growth in industry weights reflecting the growing importance of these goods and services in the economy. Demographics and the permeation of technology into all areas of our lives seem to indicate that these trends will continue
  • The Financial industry saw a boom during the middle of the period, but that was checked by the Global Financial Crisis. This too is captured by index weights
  • What is also interesting is that, given that the weight of consumption in US GDP growth has remained fairly stable, the weight of the Consumer industries (Discretionary and Staples combined) has also remained broadly stable
  • Finally, changes in the capitalization breakpoint separating the large cap Russell 1000 from the small cap Russell 2000 indices are highly correlated with real GDP growth rates, indicating that the indices accurately capture economic growth patterns

Points of differentiation:

  • This research uses the full history of the Russell indices to connect changes in the industry make-up of the Russell 1000 and Russell 2000 to fundamental changes in the underlying US economy and drives home the point that the Russell indices reflect the underlying US economy
  • The transparency of the Russell index construction methodology means that the Russell indices are representative of the underlying US economy

What our research means for investors?  

This research ties changes in the industry make-up and size break-point of the Russell 1000 and Russell 2000 to fundamental changes in the underlying US economy.  The Russell indices are representative of the underlying economy, and investors are given transparent exposure to trends in the US economy.