FTSE Russell to shake things up in upcoming reconstitution

FTSE Russell is looking to shake things up as it returns to a semi-annual index rebalancing schedule for the first time in decades and gears up for the fast entry of large IPOs into its indices.

The global index provider behind the Russell U.S. Indexes, including the Russell 1000, 2000 and 3000, is shifting back to a semi-annual reconstitution schedule this year for the first time since 1989.

FTSE Russell plans to rebalance the indices, which underpin a wide array of investment products, after markets close on the fourth Friday of June (falling on June 26 this year). Another rebalancing is slated to occur after markets close on the second Friday in December (Dec. 11).

When the Russell indices were launched in 1984, they were rebalanced quarterly. That switched to a semi-annual frequency in 1987, and then to an annual frequency in 1989. Since then, the Russell reconstitution has been done on an annual basis.

Evolving market dynamics and industry feedback inspired the return to the twice-a-year reconstitution cycle, said Catherine Yoshimoto, director, product management, benchmark product development with FTSE Russell, during a webinar on Wednesday.

“From an index provider’s perspective, we balance representation with turnover. So, the more frequent rebalances in the past have been considered [to be] adding unnecessary turnover,” she said.

“However, as you are probably feeling it daily, the markets have been moving more quickly, market caps are getting bigger, so … we did a consultation as to whether we should move back to a semi-annual reconstitution, and there was broad support.”

According to FTSE Russell, which is owned by London Stock Exchange Group, roughly $12.2 trillion in investor assets are benchmarked to or invested in products based on the Russell U.S. Indexes (all figures are in U.S. dollars).

And the Russell reconstruction typically results in one of the highest-volume trading days of the year, with more than $200 billion trading by the close of major U.S. equity exchanges over the past few years.

“This was actually one of the key points of feedback we received, for supporting semi-annual reconstitution, in order to reduce some of … the [trading] magnitude that we see in one day,” Yoshimoto said.

Another significant change this year, announced Tuesday, is that major U.S. companies that go public will be added to the indices faster than before, making FTSE Russell the latest index provider to introduce a fast-entry rule.

Historically, newly public companies had to wait until the next quarterly index update to join the Russell U.S. Indexes.

But, due to the highly anticipated launch of large IPOs from the likes of SpaceX, OpenAI and Anthropic, FTSE Russell clients and market participants started asking whether the index provider would consider adding a fast-entry rule to the Russell U.S. Indexes, Yoshimoto said. The index provider then asked the industry for input on the matter in February, and “the consultation supported” the move, she added.

Under the index provider’s new fast-entry rule, a company large enough to qualify for the Russell Top 500 — with at least $17.5 billion in market cap — and that meets certain free float or voting rights requirements can now be added just five trading days after launching its IPO.

Earlier this month, Nasdaq also announced that it would allow large-cap, newly public companies to join the Nasdaq 100 after just 15 days of trading. S&P Dow Jones, meanwhile, is considering allowing the fast-tracked entry of mega-cap IPOs into its indices, including the S&P 500, with a consultation on the subject wrapping up on Thursday.

The webinar also touched on other key themes in the U.S. equity markets, including the concentration of technology stocks across the Russell U.S. Indexes.

As of April 30, or FTSE Russell’s rank day, the largest tech companies account for about 35% of the Russell 3000 index, with that concentration even more pronounced within growth indices, Yoshimoto noted.

She also pointed out that Nvidia Corp. now ranks first among the top 10 tech companies in the Russell 3000 and 1000 indices, with $4.9 trillion in market capitalization — beating out Apple Inc. and Microsoft Corp., who have taken turns holding the top spot in recent years.

Meanwhile, Alphabet Inc. came in second place with a market cap of $4.7 trillion, and Apple ranked third, with a market cap of $4 trillion.

“So, you’re seeing the reflection of … interest in tech companies that are benefiting from what’s going on in the AI segment, or semiconductors,” reflected in terms of their market caps, Yoshimoto said.

Other large market-cap migrations are expected this year too. For example, Bloom Energy is poised to move from the Russell 2000 into the Russell 1000, as its market cap on rank day ($80.6 billion) brought it in line with the largest 200 companies in the Russell universe. The company designs and manufactures solid oxide fuel cells that produce electricity for power generation in data centres, manufacturing and other commercial sectors.

Yoshmito called the leap “unusual” and “reflective of the dynamic market we’ve been seeing in recent years.”

Preliminary reconstitution data

On May 22, FTSE Russell published its preliminary lists of companies expected to enter or exit the U.S. broad market Russell 3000 Index and the Russell Microcap Index.

Of note, technology and industrials companies are primarily expected to migrate upward from the Russell 2000 to the Russell 1000. As well, total U.S. equity market capitalization of the broad Russell 3000 Index increased by 29% year over year to $75.6 trillion as of the April 30 rank day, which FTSE Russell attributed to “continued mega-cap strength alongside a resurgence in small-cap performance.”

The preliminary data further show that the gap in market capitalization between U.S. small caps in the Russell 2000 and large caps in the Russell 1000 was up 24% to $5.7 billion, “reflecting broad-based growth across market segments.”

More preliminary results are expected in the coming weeks, ahead of the June semi-annual reconstitution.