Assets following a Russell 3000 mandate do not have a significant issue with the reconstitution since the turnover is lower than any of the other Russell indexes or the S&P 500. The reason is that the turnover in this index is primarily due to mergers and acquisitions (M&A) activity and stocks coming and going from the index at the lower capitalization (and therefore lower weighting) levels.
The Russell index with the second largest amount of assets in index funds, with more than $60 billion, is the Russell 1000. Since the Russell 1000 is simply the largest 1000 companies in the U.S., its turnover is relatively low as well. Once again, the turnover is from M&A activity and smaller companies that have grown large enough to join the index. In some years the turnover in the Russell 1000 is lower than the S&P 500; in other years it's greater. Since the M&A activity turnover is spread out over the course of a year, the turnover at the time of reconstitution of the Russell 1000 is generally fairly low.
The three indexes with the next largest amount of passive assets are the Russell 1000 Value, Russell 1000 Growth and Russell 2000. These three indexes have higher turnover than the broad and large-cap indexes, and therefore merit more discussion.
Russell Style Indexes
The Russell 1000 Value and Russell 1000 Growth indexes together make up the Russell 1000. The turnover of these indexes results from several factors embedded in Schumpeter's analysis. Over time, companies and markets change. Some companies grow and others shrink, so there is movement between the Russell 1000 and the Russell 2000. Some companies develop new products and innovations and, as a result, are viewed by the market as growth companies. Some companies have more limited sources of profit and revenue growth and come to be viewed by the market as value stocks as their stock prices decline relative to their balance sheets. Thus, the market view of companies moves between value and growth and between small and large. Since the Russell 1000 Value index funds have about twice as many assets as the Russell 1000 Growth index funds there is some crossing of assets between these index funds, but not all of the trades can be conducted as crosses.
The active assets benchmarked to the Russell 1000 Value and Growth indexes have been growing significantly over the past few years. About $400 billion is now benchmarked to these two indexes. It is unclear if the investment strategies of these managers collectively have an impact on the reconstitution trade. They are certainly less tied to trading on the day of reconstitution itself.
Further, the stocks entering and leaving the Russell 1000 style indexes generally are liquid securities and the market impact of conducting trades is fairly manageable. This level of liquidity is a reason the reconstitution of the Russell 1000 style indexes does not receive as much attention.