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Point of View · 07.05.24
Russell 1000 Index Annual Rebalance: Tech Leads Weighting Gains
The addition of Dell Technologies and Super Micro boosted the weighting to the technology sector. We also analyze changes to the value and growth indexes.
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- Index Equity Strategy
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Russell 1000 Index Annual Rebalance: Tech Leads Weighting Gains
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Key Points
What it is
We analyze the impact of changes to the Russell 1000 Index and its related value and growth indexes.
Why it matters
Quarterly changes in indexes over time can impact composition and performance.
Where it's going
The weighting for the technology sector, the largest in the index, rose primarily because of the additions of Dell and Super Micro.
FTSE Russell rebalances its U.S. index series once a year to accurately represent equity markets. This process includes redefining size breakpoints between large-, mid- and small-cap companies, while also reassessing where companies fall within the value-growth spectrum. The process started on April 30, which is the “rank date” when Russell determined company market caps at the close of trading. On May 24, Russell announced memberships across its U.S. indexes, though it made adjustments until the “lock down” date of June 10. The changes took effect at the close of markets on June 28, making July 1 the first day of trading for the revised indexes.
Rebalance periods at Northern Trust Asset Management, one of the world’s leading managers of index assets,1 demand a significant amount of collaboration across our investment team. This was especially true in the second quarter, with multiple major index rebalances happening within a few weeks of each other, including from S&P- Dow Jones and MSCI. This year’s Russell rebalance has been one of our largest in terms of the total value of trades due to the growth of our funds that track these indexes along with U.S. equity markets reaching at or near all-time highs. For all our index portfolios benchmarked to the Russell indexes, we must carefully manage the rebalances to achieve our primary objective of matching the risk and return characteristics of the benchmarks.
Russell 1000 Index Changes: Super Micro, Dell Added
Russell added 38 companies to the large-cap equity Russell 1000 Index, with 11 and 27 moved up from the small cap Russell 2000 Index. Exhibit 1 shows that building materials maker CRH and computer maker Dell Technologies were the largest straight additions to the index after meeting index eligibility rules. Technology hardware provider Super Micro moved up from the Russell 2000, where it was the top weight. Russell removed 32 companies from the Russell 1000, including 30 demoted to the small cap index and two removed from the index series altogether.
The revisions resulted in to sector composition. The weighting for the information technology sector, which remains the largest sector in the index, rose 0.15%, primarily because of the additions of Dell and Super Micro. Healthcare declined 0.14% and communication services fell 0.13%.
Straight additions
Straight additions are companies added to an index for this first time without being a member of another index in an index provider’s series of indexes. This can happen when companies first meet requirements, such as those related to profitability, that make them eligible to be index members.
EXHIBIT 1: Technology Additions
Russell promoted technology hardware provider Super Micro to the large cap Russell 1000 Index from the small cap Russell 2000 Index. Computer maker Dell Technologies was added to the large cap index after meeting eligibility requirements.
Sources: FTSE Russell, FactSet, Northern Trust Asset Management. Weightings as of June 26, 2024. Index holdings are provided for information only and should not be construed as a recommendation of any security. It is not possible to invest directly in any index.
Key Shifts in the Russell 1000 Value and Growth Indexes
As part this rebalance, Russell assessed and assigned stocks that are members of the Russell 1000 Index to the Russell 1000 Value Index and the Russell 1000 Growth Index, which resulted in changes to those style indexes. Its methodology acknowledges that stocks in the Russell 1000 Index can possess both growth and value characteristics to various degrees. For example, a more growth-oriented stock may be represented in the growth index with 70% of its Russell 1000 Index weighting while the remaining 30% of its weighting is in the value index. Exhibit 2 shows the top three additions and deletions by weight for each style index. Companies can be 100% value or growth as well.
Russell 1000 Value Index
The largest addition to the Russell 1000 Value Index by weight was consulting firm Accenture, as Russell flipped its style assessment to 100% value from 100% growth. Home Depot, which was the largest addition to the index by company size, shifted to 20% value from 100% growth. The largest deletion from the value index was pharmaceutical company Merck, which shifted from 82% value to 100% growth. As for changes in sectors weights shown in Exhibit 3, financials, the largest sector in the value index, dropped the most while healthcare gained.
Russell 1000 Growth Index
The largest additions by weight are Colgate-Palmolive and Super Micro. Super Micro migrated up from the small cap Russell 2000 Growth Index and will stay 100% growth. The largest company by weight leaving the index is Accenture, which shifted to 100% value as noted above. Additionally and notably, the “Magnificent Seven”2 companies each remain 100% growth. The technology sector continues to dominate the index, edging closer to a 50% weighting after a 2.67% gain from this rebalance, as shown in Exhibit 3.
Exhibit 2: Companies with Shifting Styles
Russell’s approach to its large cap style indexes enables parts of a company’s weighting to be in both the value and the growth index. A company can also be 100% growth or 100% value. In this year’s rebalance, some companies such as Accenture moved to 100% value while Merck and Oracle moved to 100% growth.
Sources: FTSE Russell, FactSet, Northern Trust Asset Management. Weightings as of June 26, 2024. “Value” or “growth” means 100% of the company’s Russell 1000 Index weight is in the Russell 1000 Value Index or Russell 1000 Growth Index, respectively. “Both” means the company splits its Russell 1000 Index weighting between both style indexes. Index holdings are provided for information only and should not be construed as a recommendation of any security. It is not possible to invest directly in any index.
EXHIBIT 3: Tech Weighting Approaching 50% in the Growth Index
In the growth index, technology continues to dominate, edging closer to 50% of the total weight of the index after a 2.67% increase during this rebalance. In the value index, financials dropped while healthcare gained.
Sources: FTSE Russell, FactSet, Northern Trust Asset Management. Weightings as of June 26, 2024. Index holdings are provided for information only and should not be construed as a recommendation of any security. It is not possible to invest directly in any index.
Performance Analysis: Russell 1000 Index Changes
In the Russell 1000 Index, the adds, which include straight additions plus promotions up from the Russell 2000 Index, outperformed the deletes by 3.2% from the May 24 announcement date to the June 28 effective date, as shown in Exhibit 4. This means the performance spread went “right way”, or the same direction as the expected trade flow. Excluding the adds and deletes, companies with share increases outperformed those with share decreases, reflecting a similar “right way” performance spread.
EXHIBIT 4: ‘Right Way’ Performance
Added companies may outperform deleted companies, or companies with weighting increases may outperform those with weighting decreases, which in both cases is called "right way" performance. That occurred during the rebalance period from the May 24 announcement of index members to the effective date at the close of markets on June 28.
Sources: FTSE Russell, FactSet, Northern Trust Asset Management. Shares may increase or decrease because of new corporate share issuance or buybacks. Shares also may increase if insiders sell shares into the public market (increase) or buy shares from the public market (decrease).
What the Rebalance Means to Investors and Index Managers
Attentive analysis is crucial to understand how an impending index rebalance will shape these indexes, and by extension, the portfolios that track it. We believe this requires a careful review of liquidity conditions, expected trade flows and optimal trade strategies. The aim for portfolio managers is to keep tracking error to a minimum while ensuring that the market impact and trading costs related to rebalancing do not erode wealth over time.
15th largest index manager according to Pensions & Investments’ Special Report on the Largest Money Managers released June 12, 2023. The ranking is based on total worldwide assets under management as of December 31, 2022. Past performance is not indicative of future results.
2The Magnificent Seven is a group of stocks with among the largest market capitalizations in the U.S., including Alphabet, Amazon, Apple, Microsoft, Meta, NVIDIA and Tesla.
Main Point
Added Companies Outperformed Deleted Companies
Russell added 32 companies to the large cap equity Russell 1000 Index and removed 32 companies. The largest additions were CRH, Dell Technologies and Super Micro. During the rebalance period from May 24 to June 28, added companies outperformed deleted companies by 3.2%.
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