Prepared For Russell Index Rebalance?


Simpler Trading Team

Jun 25th 2020  .  2 min read

One of the year’s biggest market events is set to shake up trading.

The annual Russell US Indexes reconstitution, or rebalancing, concludes weeks of updates on Friday. FTSE Russell, the indexes administrator, redefines the capitalization breakpoints between top U.S. equities. This is done each year on the last Friday in June to take into account market changes over the previous 12 months.

Companies flow in or out of the Russell indexes based on market capitalization. There are more than 10,000 publicly traded companies in the US stock market. FTSE Russell ranks the largest 3,000 as the Russell 3000 Index. These companies represent about 98% of all U.S. incorporated equities.

The Russell 3000 breaks down into the large-cap Russell 1000 Index and the small-cap Russell 2000 Index.

Under a “normal” year of market changes, companies move in or out of one index to another or can be dropped from the overall index. This creates significant market speculation about which companies are “in” and which are “out.”

With the Covid-19 pandemic effect on individual companies and the overall markets, the Russell stands to be the most volatile exchange of stocks this year. The volume of this exchange is expected to be in the billions of shares.

Traders who follow the Russell may take on the speculative risk related to trading this volatility before the new index is announced. Others may trade the Russell once the rebalanced index is set and the indexes are newly aligned for the next 12 months.

Despite the massive volume of shares exchanged each year with the Russell, many traders aren’t aware of the event or its potential impact on the markets.

Traders not familiar with the event should consider sitting out this year’s reconstitution that is expected to drive volatile speculation. Sitting in cash on a Friday and watching how it unfolds is a viable position.

Anyone trading this event is encouraged to maintain personal risk tolerance and position sizing.

We Saw: markets fighting a pullback on the way to positive gains — 

  • Fed his bank dividends
  • Fed suspends stock buybacks
  • Nasdaq regains rise above 10,000

We’re Watching: holding positions, seeking opportunities —

  • Honey Badgers still outperforming
  • Level of Russell Index volatility
  • Setups in: FAANG and COVID tickers

Does it make sense to “see” price moves before they happen? Learn about catching “pops and drops” in a volatile market.