As featured on the website Travilliannext.com on February 9, 2021
Russell reconstitution this year could be more impactful, for a wider swath of companies, than in years past.
The reconstitution of the Russell indexes takes place annually, at the midpoint of the year. Bank stocks are added to and deleted from the index based primarily on market capitalization thresholds that vary from year-to-year due to stock price movements and M&A activity. Many investment funds are indexed to the Russell and are thus required to buy or sell stocks on a formulaic basis upon reconstitution every year. In advance of the actual event, other market participants attempt to anticipate the results of the reconstitution. This dynamic can materially impact stock prices for several months before and after reconstitution and, within that period of time, can sometimes overwhelm all other variables that typically drive movements in share price.
There are several investment banking firms that have teams dedicated to predicting and analyzing the Russell reconstitution and those firms are much better suited to addressing the specifics of how the process works. That said, I do have a couple of anecdotal observations that I think could make this year’s Russell event potentially more consequential than in prior years.
