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The Russell Rebalance Trades: What to Expect

Traders Magazine Online News, June 21, 2017

Ivan Cajic

This Friday will be one of the biggest – and busiest – trading days in the U.S. equity market, as investment managers adjust their portfolios in accordance with the Russell Reconstitution, the annual change in the FTSE Russell investment indices, which occurs after the close this year on June 23rd. The Russell 1000, Russell 2000 and Russell 3000 are among the most widely followed U.S. indices, with an estimated $3.8 trillion in assets tracking the benchmarks.

ITG's Ivan Cajic, Head of Index Research, projects that this year’s reconstitution will lead to more than $23 billion in net turnover, with projected turnover across the broader Russell 3000 generally in line with the 2016 reconstitution, higher turnover in the large-cap Russell 1000 and lower turnover in the small-cap Russell 2000. 

Some highlights of this year’s trade:

•             There are 10 additions to the Russell 1000 index, compared to only 2 last year. There are also 2 deletions from the index, the more noteworthy being Thomson Reuters (TRI, -$0.45 billion to sell), which will be re-domiciled to Canada.

•             There are 186 additions to the Russell 2000 index along with 107 deletions. This is roughly in line with the 183 additions and 128 deletions seen last year.

•             43 companies will migrate from the Russell 1000 to the Russell 2000 and 31 companies will migrate from the Russell 2000 to the Russell 1000.

•             The largest net sector inflows are expected into Energy ($1.79bln to buy) and Info Tech ($1.5 billion to buy) with the biggest outflows in Financials (-$2.63 billion to sell) and Consumer Staples (-$0.81 billion to sell).

•             Some of the biggest expected trades include NXP Semiconductors (NXPI, $1.18 billion to buy), Apple (AAPL, -$0.86 billion to sell), Facebook (FB, $0.47 billion to buy) JP Morgan (JPM, -$0.39 billion to sell) and Amazon (AMZN, $0.33 billion to buy).

•             More IPOs: 3 recent initial public offerings are being added to the Russell 1000 and 24 to the Russell 2000, compared to just 1 and 14, respectively, in 2016.

•             Notably absent from the Russell 1000 is Snapchat (SNAP), which was excluded due to its IPO containing all non-voting shares. After objections from index investors, FTSE Russell deferred the inclusion of any zero-voting-rights securities in its indices until the conclusion of its consultation period at the end of June. 

Depending on index membership, we estimate that Russell indexers hold more than 10% of the total float shares outstanding in some of these names. As a result, additions or deletions from the index can generate significant price impact and create a substantial liquidity event. These liquidity events make the Russell Reconstitution a noteworthy occurrence even for many traders who are not benchmarked to the indices.


Ivan Cajic is the Head of Index Research at ITG

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