How Russell Rebalance Impacts ETFs

FTSE Russell just completed its annual reconstitution of key Russell indices, an event that happens every June, and this year it impacted 80 ETFs with $364 billion in assets under management.

Data always tell a story, and the shift in the Russell indices is no different. The changes in the benchmarks relative to the previous year paint a picture of a strong recovery that has caused the value of equity markets to soar.

Market Grows

The total market cap of the Russell 3000 Index rose to $47.7 trillion. This is a 51.9% increase from last year, when markets were in the early stages of recovery from the March 2020 bear market.

The total market cap of the top 10 companies is now $10.9 trillion, a 53% increase from last year. Alphabet ranks 4^th in size this year, and saw a 66.8% increase in market cap. Johnson & Johnson, on the other hand, only grew by 10.7% since last year’s reconstitution.

The breakpoint between the large and small cap segments is a key function of the annual event. This year’s change underscores the growth in asset prices over the past year. In 2021, the breakpoint between the large and small cap size segments reached its highest level ever, at $5.2 billion.

Largest Large Cap Companies

There was no change to the largest five companies in the Russell 3000 and 1000 indices, though the order did see some shifting. Apple is now the largest company in the index, switching places with Microsoft, which fell to the second-place spot. Amazon.com, Alphabet and Facebook round out the top five. Tesla and JPMorgan Chase are new entrants to the top 10, rising from 35^th and 12^th place, respectively.

The Russell 1000, representing the U.S. large cap market, saw 56 companies added to its ranks. Most had graduated from the Russell 2000 index, including Caesars Entertainment, GameStop and Novavax. Twenty-six companies joined as new additions to the index universe, including DraftKings, DoorDash and Snowflake.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

The total market cap of the Russell 2000, representing small caps, is $3.5 trillion. This is an 84.2% increase since last year, and demonstrates just how much small cap stocks have rallied since last June.

A total of 271 companies are being added to this index; 45 of these have dropped from the Russell 1000 Index, while 52 have shifted up from the Russell Microcap Index. The remainder were added through IPOs or by joining from outside the index universe due to eligibility rules.

ETF Impact

With a slew of ETFs benchmarked to the Russell indices, the annual reconstitution means these funds must buy or sell underlying stocks in order to track their benchmarks. According to data from Morningstar, the Russell US indices are currently tracked by 80 ETFs with $364 billion in AUM.

The largest Russell-linked ETFs all fall under the iShares umbrella. The largest iShares ETF tracking a Russell index is the iShares Russell 2000 ETF (IWM), standing at $69.7 billion. The large cap style funds round out the top three. The iShares Russell 1000 Growth ETF (IWF) holds $69.3 billion, while the iShares Russell 1000 Value ETF (IWD) holds $53.7 billion.

When it comes to the Russell 3000, about $13 billion is pegged to this index. Two ETFs dominate the space: The iShares Russell 3000 ETF (IWV) holds the lion’s share of the assets, at $11.9 billion; the Vanguard Russell 3000 ETF (VTHR) is the second largest in the category, at $1.1 billion.

There are three ETFs totaling $33.6 billion tracking the Russell 1000, and here too, iShares is the dominant player. The iShares Russell 1000 ETF (IWB) holds $29.7 billion, while the Vanguard Russell 1000 ETF (VONE) has about $2.4 billion.

The Russell 1000’s allocation to health care decreased, while tech and consumer discretionary names make up more of the index after this year’s reconstitution.

Another ETF tracking the Russell 2000 is the Vanguard Russell 2000 ETF (VTWO). This space is also popular with leveraged and inverse strategies.

The largest, the Direxion Daily Small Cap Bull 3x Shares (TNA), currently stands at $1.7 billion. Investor interest in this strategy is no surprise, given how strongly small caps have performed over the past year.

The Russell 2000 saw an increase in its weighting to health care, driven by an influx of biotech names.

For more information on the Russell reconstitution, click here.

Contact Jessica Ferringer at [email protected] and follow her on Twitter