The annual reconstitution process for the Russell US Indexes is an important event, affecting all ETFs that track related indexes. This year, the newly reconstituted indexes took effect at the market close on June 24. To give an idea of the significance of this event, data from FTSE Russell shows that last year’s reconstitution necessitated $186 billion in trading between the NYSE and Nasdaq exchanges.
This annual reconstitution is necessary to reflect shifts in the US equity market. This year, investors face a significantly different market than they did last June so it is no surprise that there were some big changes within the indexes that will flow through to ETFs that track indices such as the Russell 1000.
FTSE Russell growth or value?
One of the most significant changes within the reconstitution this year has to do with shifts between the Growth and Value indexes. FTSE Russell uses a specific methodology to determine which stocks fall into each bucket.
For value, the firm uses a book-to-price ratio and for growth, two metrics are used: I/B/E/S forecast medium term-growth (2-year) and sales per share historical growth (5-year). Stocks are assigned a “probability” of growth or value characteristics that adds up to 1 and is assigned a relevant weight in each style index. This means that stocks can be represented in one or both indices depending on whether it is 100% growth, 100% value, or somewhere in between.
Tech tilts towards value
The battered technology sector is reflected in its shrinking weight within the Russell 1000 Growth Index. While it remains the largest sector, the reconstitution shifted its weight from 48.1% to 44.7%. Consequently, technology’s weight in the Russell 1000 Value Index has risen from 7.4% to 9.1%.
Companies like Meta, previously only found in the Growth index, are now found on both the growth and value side. As an example, Meta, previously ranked as 100% growth is now 79% value. As of June 29, the company holds a 1.7% weight in the iShares Russell 1000 Value ETF (IWD) and a 0.5% weight in the iShares Russell 1000 Growth ETF (IWF).
Energy’s surge causes shift
The energy sector’s surge is evident in the Russell 2000 style indexes. Within the Russell 2000 Growth index, the sector’s weight increased from 4.7% to 8.2% while concurrently falling from 11.3% to 5.4% within the Russell 2000 Value index.
The rising market capitalization of these energy companies also affected the composition of the Russell 1000 and Russell 2000 indices. In total, 21 companies moved up from the small cap index to the large cap index and six of these companies are involved in the energy sector.
The Bottom Line
Investors should keep in mind that even though ETFs that track benchmarks like the Russell indexes are “passive”, there can still be changes within the holdings – sometimes significant changes.
While many likely still think of most technology companies as growth stocks, Russell’s methodology is now assigning some of these companies a larger weight in the value index. For investors who are unaware of this reconstitution process or timeline, owners of these ETFs might not be aware of how their equity exposure has shifted.
Passive ETFs have rebalancing and reconstitution dates that differ from fund to fund. Whether a quarterly, semiannual, or annual process, these events can significantly shift weights and holdings within the ETFs. Before buying an ETF, investors should be aware of the methodology underlying the fund and the effect this could have on the composition of the portfolio.
