May 02, 2024

Four Decades of Russell Indexes Reconstitution

We show how the Russell US indexes are fully reconstituted each June, helping reflect the current state of the US equity market, including its size and style segments. The reconstitution is one of the most widely followed events in the US equity market calendar.

What does our research mean for investors?

By reading this paper, investors will become better aware of the way the Russell US indexes are built and maintained. They will gain an understanding of the key design elements that make these indexes the preferred choice for many professional investors.

Points of differentiation:

  • Russell index design is rules-based, with no subjectivity
  • Russell US indexes are modular, with no overlaps
  • Enhancements added to the indexes over the past 40 years make them suitable for use in index-tracking funds
  • Russell reconstitution, which occurs every year in June, is a top-to-bottom recalibration of the Russell indexes. It is possibly the most widely followed event in the whole US annual equity market calendar.1

    The annual reconstitution ensures that the indexes continue to accurately reflect the current state of equity markets and their market capitalisation segments (large cap, mid cap, small cap, micro cap), industry breakdowns and style structure.

    Reconstitution is closely tracked by professional money managers as they rebalance their portfolios with the goal of minimising unwanted benchmark risk. Other close observers include brokerage houses, who, in the weeks leading up to reconstitution, prepare for large blocks of trades by researching and reporting on the shifts that may occur, and managing their inventory accordingly. To support these activities, FTSE Russell provides products like the Russell Monitor List (RML), a monthly file containing Russell Nationality data for equities listed on eligible US exchanges, including newly listed companies.2

    Annual reconstitution also ensures accurate market representation by reflecting the changes that have occurred over the course of each year. Equity markets are continually changing as new companies are listed, existing firms are acquired or merged, successful companies grow from small to mid cap (or from mid cap to mega cap) in size, and other companies shrink or go bankrupt. Specific industries and sectors come into and go out of favour, depending on consumer trends, investor sentiment and market cycles. Political developments can trigger market movements and, as we saw in 2020, unexpected events like the COVID-19 pandemic can cause a major shift in the level of equity markets and in the relative valuations of individual stocks.

    1 See What to Know About the Annual Russell Index Changes | Nasdaq

    2 US nationality is a prerequisite for companies to be eligible for Russell index inclusion.

  • Every year as of the rank day (the last business day in April), all eligible stocks in the US are ranked by total market cap, in descending order.

    We start with all US equity securities (around 7,000 individual names), then remove ineligible securities (such as those with a market capitalisation below $30 million or those with inadequate float or liquidity) from the list. This step reduces the list to approximately 5,000 names. The next step captures and ranks the largest 4,000 stocks by total market cap, the largest 3,000 of which form the Russell 3000 Index. The largest 1,000 stocks in the Russell 3000 become the large cap Russell 1000 Index, and the next 2,000 stocks become the small cap Russell 2000 Index.

    Other indexes (e.g., the Russell Top 50, Russell Top 200, Russell Top 500 and Russell 2500) are formed the same way, thereby creating the entire series of Russell US indexes.

    All index constituents are weighted in the index according to their float-adjusted market capitalisation.

  • Since the inaugural Russell reconstitution in 1984, we have made several methodological enhancements to improve the process. Many of these enhancements were inspired by the evolving use of the Russell Indexes, and in particular the growth in index-based investing (notably by means of passive investing, such as through ETFs).

    As the volume of assets passively tracking the indexes has continued to increase over the years, Russell has taken steps to enable the easier management of reconstitution for those replicating an index, such as index fund and ETF managers.