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 straight additions 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 modest changes 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%.
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.
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.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
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