While summer activities take center stage, the financial markets are busy with key index rebalances. Between late May and the end of June, major index providers like S&P Dow Jones, MSCI, and FTSE Russell undertake significant rebalancing efforts. These events can potentially help benchmarks maintain exposure to companies within their targeted asset class or markets, but the rebalancing can also impact investment portfolios. Let’s take a closer look.
For many investors, an allocation to an index investment is an important part of their portfolio, such as an S&P 500 ETF, a Russell 2000 mutual fund, or an MSCI Emerging Markets Index fund. While index investing gives participants exposure to specific asset classes, many may not realize how often indexes change because it looks like a single, unchanging holding on a quarterly statement. Regular rebalances of these indexes are crucial for maintaining accurate exposures within benchmarks. S&P and MSCI rebalance quarterly, while the Russell index family makes most changes annually during the Russell Reconstitution in late June, involving stocks moving in and out of the various Russell indexes.
In this year’s Russell Reconstitution, 38 stocks moved into the Russell 1000 Large-Cap Index, with 27 migrating from the Russell 2000 Small-Cap Index. Conversely, 32 stocks left the Russell 1000, mostly moving into the Russell 2000. Additionally, the Russell 2000 Small-Cap Index saw 206 stocks added and 142 stocks deleted. These movements are designed to help FTSE Russell adjust their benchmarks to accurately reflect targeted exposures. Without regular rebalancing, indexes like the Russell 2000 could end up holding mid-cap, large-cap, and some micro-cap stocks and miss new small-cap stocks.
As benchmark providers update their indexes, asset managers responsible for managing ETFs, mutual funds, and other index funds must also adjust their holdings. Portfolio managers use their expertise to align funds with benchmark exposures, a process that can involve significant trading. It’s estimated that asset managers executed trades valued at over $140 billion for the Russell Reconstitution. As a significant index investor ourselves, Northern Trust Asset Management manages these events and all upcoming index rebalancing events with our usual care and diligence.
IMPORTANT INFORMATION
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.
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