Indexes Show Large-Cap Strength

Terry Flanagan

June 27 was “reconstitution day” for Russell Investments, marking the annual realignment of its U.S. equity indexes to reflect market changes.

This year marks the 30th year of the Russell indexes. At its first rebalancing in June 1984, the dividing line between the Russell 1000 and 2000 was a market capitalization of $255 million. By the time of the June 2014 rebalancing, the threshold was $3.1 billion, up from $2.6 billion a year earlier.

“The break point between the U.S. Large cap and U.S. Small cap is at a record high this year,” Rolf Agather, managing director of global index research and innovation at Russell Investments, told Markets Media. “It’s a pretty big increase, and that’s reflective of the fact that large cap stocks have actually done pretty well relative to small cap stocks, and that’s a sign of a good general equity market return.”

Reconstitution is one of the biggest trading days in the U.S. market, and it’s also one of the most anticipated. “We try to be as transparent as possible about our process and then also with the data that was used for the reconstitution,” Agather said. “The end of May is what we call ‘Rank Day’, that’s when we take a fresh look at global markets, not only the U.S. By using the overall index method, we make our cuts between the large cap and small cap indexes as well as the growth and value index.”

In the U.S. market, the Russell 1000, 2000 and 3000 Indexes reached new record highs in the past year. Large caps outperformed small caps during the one year period ending May 30, 2014, with a 20.9% return for the Russell 1000 Index relative to a 16.8% return for the Russell 2000 Index. “Clearly, last year was more of a small cap cycle, this year is more of a large cap cycle,” Agather said.

The largest three companies in the Russell U.S. Indexes in terms of total market capitalization at this year’s reconstitution are Apple ($545.3 billion), ExxonMobil ($431.7 billion) and Google ($385.6 billion). Apple retains its position as the largest U.S. stock in the Russell Indexes in terms of market capitalization, increasing by more than 29% from 2013, and now stands at 100% growth (last year it was 76% growth, 24% value).

In mid-June, Russell Investments posted its official lists of companies set to join or leave the Russell Global Index, Russell 3000 Index and Russell Microcap Index before the annual reconstitution. “We start to notify clients and other market participants in the middle of June with what we call the Preliminary List, and that’s where everybody starts to get their information on adds and the leads that we expect to make at the end of June,” said Agather.

Since 1984, Russell has employed the methodology for its U.S. indexes to represent the global equity markets with the Russell Global Index. “We have a set of rules that look at economic criteria, and we also set up what we call market criteria, like repatriation of funds or foreign exchange restrictions,” said Agather.

Emerging markets performance has been disappointing. “Coming out of a fairly deep recession, there was an expectation that more risky markets would have been the place to be and yet as we’ve seen, it’s U.S. markets that have done well particularly in the last year, followed by other developed markets,” Agather said. “Emerging markets really have lagged considerably, especially over the last year, leading into this reconstitution.”

Featured image via Dollar Photo Club

Related articles

  1. Investors are seeking the tax efficiency, trading flexibility and cost benefits of ETFs.

  2. Low Bond Yields Force Pensions’ Hand

    US Department of Labor has allowed pension plan fiduciaries to consider ESG factors.

  3. Goldman Sachs Asset Management agreed to pay a $4m penalty.

  4. FINRA membership marks further momentum in WisdomTree Securities' digital strategy.

  5. The prior administration’s restrictions on retirement plans and ESG were removed.