By Christine Idzelis
The annual Russell rebalancing process starts on ‘rank day,’ says a Jefferies equity strategist
It’s “rank day” for the U.S. stock market.
That’s when FTSE Russell, a global index provider, kicks off the annual rebalancing process for its Russell U.S. indexes to ensure they accurately reflect the U.S. stock market. At the close on Friday, FTSE Russell will look at companies’ market value to determine their index membership eligibility under its 2022 “reconstitution,” according to a statement from the index provider in early March.
“Russell ranks stocks based on their market cap,” said Steven DeSanctis, an equity strategist at Jefferies, by phone. “They start to delineate” small-cap, mid-cap and large-cap stocks, he said.
FTSE Russell also considers which companies may be added to Russell’s U.S. indexes after emerging from bankruptcy over the past year, which ones meet the index provider’s threshold for “voting shares” and those that may be eligible for index inclusion after going public through a merger with a special purpose acquisition company known as a SPAC, according to DeSanctis.
It all leads up to “a pretty dramatic change” on June 24, he said, when the reconstitution becomes final after the close of the U.S. stock market. “That’s why people start looking at it in May,” he said. Next month’s reconstitution “tends to be the biggest trading day of the year.”
Investors will be assessing any changes they may need to make in their portfolios to potentially be more in line with the indexes, said DeSanctis. For example, he said the Russell rebalancing may change “sector weights” in a way that leaves investors overweight to a certain area.
A preliminary list of index additions and deletions will be posted to the FTSE Russell website on June 3 after 6 p.m. Eastern Time in the U.S., according to the firm’s March statement. Equity markets will open June 27 with the newly reconstituted Russell U.S. indexes.
Jefferies has “a projection list,” said DeSanctis.
While FTSE Russell will use May 6 prices to determine the indexes, Jefferies estimated in a research note dated May 1 that the top end of the small-cap Russell 2000 index was down to $6.6 billion, with the smallest market cap at $230 million.
At the time, Jefferies pegged the new top end of the Russell 2500 at $17.7 billion, while estimating the largest name in the Russell Midcap index at $46.7 billion and the largest market cap in the Russell 1000 at about $2.6 trillion, the report shows. As part of the rebalancing, a style ranking will take place on May 31, according to Jefferies.
The recent market pullback in so-called FAANG stocks — the group including Facebook parent Meta Platforms Inc. (FB), Amazon.com Inc. (AMZN) Apple Inc. (AAPL), Netflix Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL) — led to Jefferies putting Meta entirely in the Russell 1000 Value index , the May 1 report shows.
Amazon has “some weight in this index as well,” Jefferies equity analysts led by DeSanctis estimated in the note on the Russell rebalancing process. Meta and “some” of Amazon moving to the large-cap value index, from the large-cap growth index, would result in some sector weighting changes, according to the note.
For example, a loss of Meta from Russell 1000 Growth would diminish the weight of communications services in the index, the analysts said. Meanwhile, health care stands to see its weight rise in the Russell 1000 Growth index, according to the Jefferies note.
“You don’t want to be shocked” on June 27, said DeSanctis.
Read:With interest rates rising, it’s time to focus on MANG stocks instead of FAANG, according to Jefferies
U.S. stocks were under pressure again Friday, with all-three major benchmarks, the Dow Jones Industrial Average , S&P 500 and Nasdaq Composite , down in early afternoon trade, according to FactSet data. The Russell 2000 index was off around 1.2% in early afternoon trading Friday, steepening its slide this year to almost 18%, FactSet show, at last check.
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