How Russell Index Changes Impact ETFs

Global index provider FTSE Russell just completed its annual reconstitution of key Russell indices, adjusting their mix to reflect changes in companies’ size as determined by market capitalization as well as style fit over the previous year.

In a recap of the main trends seen in this year’s reconstitution, the index provider noted that the total market cap of the Russell 3000 grew some 13% to a record $27.2 trillion, primarily due to market performance. The U.S. equity market has gotten bigger.

Higher Large/Small-Cap Breakpoint

Along with that came a higher “breakpoint” between large- and small-cap stocks, now at $3.4 billion, up from $2.9 billion just a year ago.

Among the names highlighted in this year’s U.S. index reconstitution was Apple, which again was the largest company in the Russell 3000 Index, five years running. The tech giant is also now considered a 100% growth stock, a change from its year-earlier style split as 92% growth/8% value.

J.P. Morgan rose to be among the 10 largest U.S. companies, while Facebook and Amazon cemented their ranks among the biggest names in the U.S. market somewhat at the expense of ExxonMobil, which moved down a notch.

The Russell 1000 Index, capturing U.S. large-cap stocks, added 41 names and lost 44, including the likes of JCPenney, Fitbit and Yelp. 

In the small-cap space, as represented by the Russell 2000, some 228 companies were added to the benchmark, many in the financial and banking sector as well as health care names, particularly biotech. Names like Hertz, Dillard’s, Avis Budget Group and Frontier Communications joined the index. A total of 137 stocks left the mix, either moving up to the Russell 1000, or down to the micro-cap space. 

ETF Impact

These annual changes impact a roster of ETFs built around Russell indices, which then must buy or sell underlying stocks in order to track their benchmarks. The whole reconstitution process takes place throughout the month of June in an annual event that’s rolled out in three parts. 

Today there is more than $110 billion in U.S.-listed ETF assets linked to four U.S. equity Russell indices, the bulk of the assets being dominated by one issuer: iShares.

Among the biggest Russell-linked ETFs, all offered by iShares—are funds such as the $7.7 billion iShares Russell 3000 ETF (IWV), the $39 billion iShares Russell 2000 ETF (IWM), the $18.5 billion iShares Russell 1000 ETF (IWB) and the $36.2 billion iShares Russell 1000 Growth ETF (IWF).

Other ETFs impacted by the reconstitution include:

• Russell 3000: Beyond IWV, there’s also the SPDR Russell 3000 ETF (THRK), with $417 million in assets, and the Vanguard Russell 3000 ETF (VTHR), with $342 million. In all, there is about $8.46 billion in ETF assets tied to the Russell 3000 Index.
• Russell 2000: There are 13 ETFs on the market today linked to the Russell 2000 Index, with combined assets exceeding $42 billion benchmarked to the index. Still, the space is overwhelmingly populated by leverage and inverse strategies—10 of 13 Russell 2000 ETFs fit that bill. Only three ETFs offer vanilla exposure to the benchmark, the biggest being IWM, followed by the Vanguard Russell 2000 ETF (VTWO) with $1 billion, and the SPDR Russell 2000 ETF (TWOK), with $224 million.
• Russell 1000: Beyond IWB, there are three other Russell 1000 strategies in the market, one of which is a $1.8 million-in-assets leveraged fund. They include the $704 million Vanguard Russell 1000 ETF (VONE), and the $148 million SPDR Russell 1000 (ONEK). In all, there is about $19.4 billion in ETF assets tied to the Russell 1000 Index.
• Russell 1000 Growth: Beyond IWF, there is the $1.2 billion Vanguard Russell 1000 Growth ETF (VONG), and two leveraged ETNs by Credit Suisse and UBS that together command $2.3 billion in total assets. There is almost $40 billion in ETF assets tied to this index.

For a full list of company additions and deletions, check out Russell’s full reconstitution report. 

Contact Cinthia Murphy at [email protected]