Investors brace for annual Russell index rebalancing with pandemic imprint

Ark Solutions

21/06/2021 12:00

(Repeats story originally published on June 18, no changes)
    By Chuck Mikolajczak
    NEW YORK, June 18 (Reuters) - Market participants are
girding for probably the biggest trading event of the year next
Friday, as FTSE Russell stages the final reconstitution of its
indexes, and trillions of dollars in investments could be
influenced by the event that will reflect a wild trading year
marked by the pandemic and the "meme" stock craze.
    On the last Friday every June, FTSE Russell refreshes the
components in its range of indexes, such as the Russell 2000
 .RUT  index of small-cap stocks and Russell 1000  .RUI  index
of large-cap names. Together they make up the Russell 3000
 .RUA  index. There are also style indexes such as the Russell
1000 growth  .RLG  and Russell 2000 value  .RUJ .
    It is often the heaviest trading volume day of the year, as
investors and fund managers scramble to buy or sell shares to
dozens or even hundreds of companies to reflect changes in
indexes. Many this year will be watching "meme stocks" like
GameStop or AMC Entertainment whose value soared. Companies that
went public through mergers with a Specialty Purpose Acquisition
Company (SPAC) will also be on the radar.
    As of the end of 2020, about $10.6 trillion in investor
assets was benchmarked to Russell's U.S. indexes, according to
FTSE Russell. 
    While FTSE Russell has occasionally tweaked its rules for
inclusion in its indexes, such as allowing companies with
multiple share classes to remain in or be permitted for
inclusion, this year's reconstitution has no methodology
changes. 
    "Our policy team obviously regularly talks to the market
participants and our committees and there were no new rules
identified that were needed," said Catherine Yoshimoto, FTSE
Russell Director of Product Management. 
    Market capitalization for the Russell 3000 index vaulted
from $31.4 trillion in 2020 to $47.7 trillion as of Russell's
"rank day" on May 7, 2021. 
    Stock market volatility took the index on a wild ride in the
past two years. In early 2020, stocks sold off when the pandemic
hit but then rebounded late in the first quarter to remain about
flat from the previous year. This year the market cap for the
index surged as stocks have rebounded along with vaccine
distribution and a reduction in pandemic-induced lockdowns. 
    
    "It’s more assets, more appreciation, you’ve got some stocks
that have gotten bigger weight changes so they are going to see
more trading volume because there is jumping around, so this is
a bigger trade this year than it has been in previous years"
said Steve DeSanctis, equity strategist at Jefferies in New
York.      
    The market cap breakpoint Russell uses to determine
inclusion in the large-cap Russell 1000 or the small cap 2000
also increased to $5.2 billion in 2021 from $3 billion in 2020. 
    Perhaps no group of stocks exemplified the pandemic trading
environment more than the so-called "meme stocks" such as
GameStop  GME.N  and AMC Entertainment  AMC.N . 
    Shares for those companies had languished and even been
shorted by many institutional investors due to poor
fundamentals. They took off like a rocket as retail investors
using commission-free trading services looked for places to
invest government stimulus checks. 
    The market cap of AMC, for instance, stood at $4.3 billion
on the May 7 rank day, but has surged to over $30 billion by
June 17, well above the top end of the market cap band for the
Russell 2000 index of $7.3 billion set by Russell. 
    GameStop is expected to graduate to the Russell 1000 large
cap index. Managers who have chosen not to own those stocks
prefer they stay within the index so as not to disrupt their
performance versus the benchmark. 
   "Where those stocks move will dictate a lot of active
manager’s relative performance over the following six, eight or
10 months after the rebalancing," said Keith Buchanan, senior
portfolio manager at Globalt in Atlanta.
    "I would rather have AMC in the benchmark because obviously
since I don’t own it I think it is overvalued." Therefore, if
AMC falls, his investments would look better against the
benchmark.
    Goldman Sachs expects 255 additions to the Russell 3000 and
295 deletions, and expects 57 stocks will enter the Russell
1000, including 34 currently in the Russell 2000. Goldman
anticipated a total of 279 stock will enter the small cap index,
comprised of 232 new components and 47 being knocked down from
the large cap index. 
    A big portion of expected adds will be companies that went
public through a merger with a SPAC. Jefferies' DeSanctis
estimates over 25% of additions to the Russell 3000 are SPAC
companies.
    "It is the year of the SPAC, the year of the meme stock -
and here they are having ramifications on real money," said Ross
Mayfield, investment strategist at Baird in Louisville,
Kentucky. 
    During the event every year, volume surges near the close,
often resulting in the biggest trading volume day of the year.
The Nasdaq and New York Stock Exchange have contingency plans
for the event. 
    KBW analyst Melissa Roberts expects the bulk of passive fund
trading related to the reconstitution will occur in the last 15
minutes or so of the session and estimates the net trade will
total nearly $75 billion.
    "Let’s face it, for the New York Stock Exchange - Russell
reconstitution, from a trading standpoint, is the greatest show
on earth, that’s where it all comes down," said Gordon Charlop,
a managing director at Rosenblatt Securities in New York. 

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Performance of Russell indexes between rank days    https://tmsnrt.rs/3gFTD2o
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 (Reporting by Chuck Mikolajczak; Editing by Alden Bentley and
David Gregorio)
 ((charles.mikolajczak@tr.com; @ChuckMik; Reuters Messaging:
charles.mikolajczak.thomsonreuters.com@reuters.net))