06.07.2016

Russell Rebalances – Why Investors Should Care (by Chad Dale, ITG)

June 24th is shaping up to be the most active trading day of 2016 thanks to the annual reconstitution of the Russell 3000, FTSE Russell’s flagship US domestic index. The Russell 3000 tracks the performance of the top 3000 U.S. stocks (by market capitalization) and represents 98% of the investable equity market capitalization. The Russell 3000, along with its major sub-indices—the large-cap Russell 1000, and the mid/small cap Russell 2000, are among the most widely tracked US domestic indices in terms of total assets benchmarked.

While the 2016 reconstitution might lack the headline punch of some previous years, there is still much of interest for indexers (investors who are tracking the Russell benchmarks) and non-indexers alike. For the indexers this represents their most active period of the year, with weightings changes across Russell’s indexes requiring significant trading activity. For non-indexers, the Russell reconstitution can represent significant opportunities to move into or out of names of interest, or to attempt to profit from short-term price swings introduced by indexers buying and selling massive quantities of impacted securities. For all other market participants, it is important to at a minimum be aware of the reconstitution and be armed with the information required to navigate the short, intense bursts of trading activity.

Highlights of this year’s trade:

  • Index breakpoints have fallen substantially in the last year, so smaller companies can be included in the indices. The projected entry point for the Russell 3000 is down to $135 MM (down from $177 MM in 2015) while the Russell 1000 threshold is expected to drop from $3.4 Billion to $2.9 Billion.
  • ITG projects 169 additions to the Russell 2000 index vs. 129 deletions
  • In order for the rebalances to take effect, approximately 1.6 billion shares will have to change hands. This results in huge volume spikes in individual names, particularly in more thinly traded companies.
  • For example, the addition of real estate firm Trinity Place (TPHS) to the Russell 2000 will require the purchase of 1.5 million shares of the stock, equivalent to 175 days’ average trade volume. On the deletion side, investment manager ZAIS Group (ZAIS) is expected to see sales of 260,000 shares, representing 104 days’ average trade volume.
  • On the large cap side, TransOcean (RIG) is set to join the Russell 1000, as RIG is being redomiciled from Switzerland to the US. On the deletion side, Jazz Pharmaceutical (JAZZ) looks poised to exit as it is being redomiciled from the US to Ireland.

While there is typically a large surge of trading activity into the close on the actual day of the Russell Reconstitution (June 24th), it is also common to see elevated volume levels in the affected names in the weeks leading up to the event as indexers try to ease into and out of positions. Adding to the overall volatility this year are the Fed’s FOMC policy meeting on June 15th, followed by June 17th, which will bring quadruple witching expiry, rebalances for FTSE and S&P indexes and also an update from FTSE Russell to its preliminary addition/deletion list.

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