Friday Fun Fact: Keeping the Pulse of the Small-Cap Markets

A benchmark for U.S. small-cap stock performance, the Russell 2000 Index consists of the lower ~2,000 small-cap stocks in the Russell 3000 Index. The Russell 2000 Index is a broad-based market capitalization-weighted index that encompasses a range of sectors of the economy.

The market is constantly evolving, so how does FTSE Russell ensure its Russell 2000 Index remains a true representation of the small-cap stock market?

Performed annually, Russell U.S. index reconstitution realigns the indices to ensure they remain an accurate reflection of the U.S. markets. During this multi-week process, FTSE Russell updates changes in market capitalization, sector composition, company rankings and style orientation.[1]

May is "ranking" month, when the largest U.S. companies are lined up to form the preliminary Russell U.S. reconstitution portfolios, while June is when preliminary reconstitution portfolios are communicated to the marketplace.

For example, last year, companies like Hertz, Fitbit and Yelp all moved from the Russell 1000 Index to the Russell 2000 Index as a result of the reconstitution.[2] Historically, reconstitution day – which falls on Friday, June 22 this year – is one of the most voluminous trading days in the U.S. stock market.[3]

How Futures Fit In

Clients with small-cap exposure can hedge their portfolio with E-mini Russell 2000 Index futures. For market participants looking to manage add/deletes, Basis Trade at Index Close (BTIC) – a mechanism available for Russell 2000 futures that allows you to execute a basis trade versus the official index close – provides an alternative to trading cash baskets.

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1. Please consult FTSE Russell’s website for the most up-to-date and detailed information on Russell Reconstitution. http://www.ftserussell.com/index-series/index-resources/russell-reconstitution

2. Source: 2017 Russell Reconstitution Recap

3. Source: Reconstitution Frequently Asked Questions http://www.ftserussell.com/research-insights/russell-reconstitution/reconstitution-frequently-asked-questions

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