2021 Russell Index Reconstitution Results

  • Every year, FTSE Russell reconstitutes its US-focused family of indices to more accurately reflect current market conditions. This year’s annual rebalance went into effect on Monday, June 28 for all Russell US Indexes.
  • The results of the recon allude to an increase in the size of US equity markets and overall economic recovery.
  • Key themes we explore are small-cap outperformance and the shift between growth and value.
  • CME Group’s suite of E-mini Russell Index futures provide risk management tools to market participants looking to hedge or gain exposure to Russell US Indexes.

The close of the market on Friday, June 25 marked the end of the 2021 reconstitution of the Russell US Indexes. The newly-rebalanced indexes took effect on Monday, June 28 and will remain in place until the next reconstitution in one year’s time. Changes in market capitalization, sector composition, company rankings, and style orientation are reflected in the new index composition.

This closely-watched market event impacts more than $9 trillion in investor assets benchmarked to or invested in products based on the Russell US Indexes. Countless ETFs, mutual funds, and managed asset programs mirror the composition of the Russell U.S. Indexes in their investment funds, structured products, and index-based derivatives.

Highlights of the Russell Recon results

The importance of the Russell Reconstitution was previously discussed, but now that the results1 are in, there are some key statistics worth highlighting:

This year’s reconstitution reveals the US equity market increased in size, with the total market cap of the Russell 3000 Index up 51.9% from $31.4 trillion as of last year’s rebalance to $47.7 trillion based on this year’s rank day (May 7, 2021).

Overall, this year’s recon is characterized by the outperformance of the small-cap Russell 2000 Index, driven by both economic stimulus and recovery in the markets as vaccination rates propel economies to open to their pre-pandemic levels. Moving forward, the performance of these cyclical, small-cap, growth and value stocks may strengthen as the US economy continues to accelerate upward, ultimately providing more opportunities for market participants to manage their exposure.

Russell 1000 Index

  • Representing the US large cap market segment, the total market cap of the Russell 1000 Index increased 49.5% from $29.5 trillion as of last year’s reconstitution to $44.1 trillion.
  • The largest five companies in the Russell US Indexes have remained unchanged since 2019’s reconstitution, but their order has since changed
  • Four companies surpassed the $1 trillion market capitalization mark, up from three last year, with Alphabet Inc. joining Apple Inc., Microsoft Inc., and Amazon.com.
  • Tesla Inc. and J.P. Morgan Chase entered the top 10 companies by market capitalization, replacing Proctor & Gamble Co. and Walmart Inc. The top 10 companies had a total market capitalization of $10.9 trillion, up 53% vs. 2020, and representing almost one-quarter of the total market capitalization of the Russell 1000 and 22.9% of the Russell 3000.
  • Five IPOs are being added to the Russell 1000 index at this year’s reconstitution, as well as 26 companies that are joining as new additions to the Russell US Indexes universe.

Russell 2000 Index

  • Representing the US small-cap market segment, the total market capitalization of the Russell 2000 Index increased 84.2% from $1.9 trillion as of last year’s reconstitution to $3.5 trillion.
  • 38 IPOs were added to the Russell 2000, 21 of which are classified in the health care industry.
  • The largest company in the index (with banding applied) is Performance Food Group, with a total market cap of $7.3 billion, a 65.9% increase from last year’s largest company.
  • The smallest company in the Russell 2000 (Velocity Financial) has a total market cap of $257.1 million, an increase of 171.2% from $94.8 million in 2020.

Breakpoints

Year-to-year changes in the breakpoint between the Russell 1000 and the Russell 2000, i.e., the market capitalization that demarcates the boundary between large-cap and small-cap sectors, makes a useful gauge of secular growth in market valuations. Reflecting a promising 12 months for US small-cap shares and economic recovery, the latest reconstitution saw the breakpoint between large-cap and small-cap stocks increased 73.3% from $3.0 billion in 2020 to $5.2 billion.

Exhibit 1: Breakpoints between Russell 1000 and Russell 2000 Indexes

Source: FTSE Russell. Reflects data as of May 8, 2020 and May 7, 2021, respectively.

A record number of banks removed this year

The surge in IPO activity in the past 12 months has been remarkable. More than 850 companies have gone public in the US, raising a record $173 billion, the highest level of activity dating back to February 1997. The market cap threshold for inclusion in the Russell 2000 has risen to $257 million, the highest since 2007.

Exhibit 2: Historical Market Cap Thresholds for Russell US Indices

Source: FTSE Russell

US banks have lagged the post-pandemic market recovery, and as a result, many were dropped from the Russell 2000 this year. In fact, a record number of financial services companies were deleted from the Russell 2000 Index this year.

Small-cap Russell 2000 outperforms

Away from the limelight that FAANG stocks and the Nasdaq-dominated stocks get, small-cap shares had a tremendous run over the last 12 months, and for those investors looking to invest in small-cap stocks available in US stock market, the go-to index became the Russell 2000.

Comparing June 25, 2021 to the same day in 2020, the price of the Russell 2000 Index increased by 66%.

Exhibit 3: Russell 2000 Index Historical Price

Source: Bloomberg LLC

Like most equity indices, the price of the Russell 2000 initially took a steep dive with the shutdown of the world economy as a result of COVID-19.

Small cap outperformance was a trend that began with a surge in performance in Q4 2020 and has closely tracked the vaccine- and stimulus-fueled rise in long-dated US Treasury yields. This macroeconomic backdrop aided the cheaper cyclical stocks that make up a bigger portion of the Russell 2000, small-cap index rather than the pricier tech stocks that dominate the larger Russell 1000 and the Nasdaq-100.

This rotation into cyclical stocks has slowed since mid-March with the recent stabilization in government bond yields, and release of consensus-beating quarterly earnings result and has favoured a shift back to growth stocks. None the less, the Russell 2000 has surged to a new, higher level in 2021, and when compared to its index counterparts, the performance of the Russell 2000 is unmatched.

Exhibit 4: Russell US Indices Performance

Source: FTSE Russell. Reflects data as of May 28, 2021.

Growth to value shift

The year 2021 saw a rise in both the Russell 1000 and 2000 Value Indices, much of that driven by the Health Care industry. Specifically, the Russell 1000 Value Index saw an increase in the health care industry, whose weight increased from 11.8% in 2020 to 16.2% of the index. Similarly, the Russell 2000 Value Index also saw an increase in the weight of health care-classified stocks, from 5.6% in 2020 to 10.5%.

Exhibit 5: Total Return of FTSE Russell Growth and Value Indices

Source: FTSE Russell. Reflects data as of May 28, 2021

There are times, especially after major market downturns, that value can be found in both the value and growth indexes. There are distinct differences in the sector weights within the two style indexes, as such, major moves in particular sectors can have an outsized influence on the relevant index performance. This is especially true, when we look at these indices throughout the COVID-19 pandemic

Initially from the start of the pandemic, marked by the market low on March 23, 2020 through to the fresh all-time highs of the S&P 500 and Nasdaq-100 on September 2, 2020, the best-performing sectors were technology and consumer discretionary. Both these sectors represent a much larger proportion of the Growth Indexes; 60% of the Russell 1000 Growth Index; and 35% of the Russell 2000 Growth Index. In contrast they only account for about 20% for the Value Indexes. During this phase, growth had been outperforming value.

Also, note that Tech represents a much larger share of the Russell 1000 Growth Indexes than the Russell 2000 Growth Index. That bias also explains why large caps were outperforming in the early part of 2000, at the start of the pandemic, and large cap growth was outperforming.

Since the fresh all-time highs on September 2, 2020, it’s been an entirely different story. Since then, the best performing sectors have been energy and financials. The combination of those two sectors account for only 2-4% of the two Russell Growth indexes; yet they account for 26% of the large cap Russell 1000 Value Indexes; and an even loftier 32% of the small-cap Russell 2000 Value Index. In other words, the narrative over Q4 2020 has been that small cap value has been outperforming.

Driven by numerous fundamental factors, the interplay between growth and value stocks will continue to be a focus for US investors. CME Group’s E-mini Russell Index futures can be used as a risk management tool to hedge the shifts in the Growth and Value indices. Russell 1000 Value futures have shown tremendous growth since the 2020 reconstitution, with open interest reaching a record high of 43,302 on June 17, 2021.

Exhibit 6: E-mini Russell 1000 Value Futures

Source: CME Group

Russell 2000 as an economic indicator

The performance of the Russell 2000 in 2021 shows the importance of including small cap stocks alongside the Nasdaq-100, the S&P 500, and the Dow Jones Industrial Average.

Exhibit 7: Major US Equity Indices Prices, March 2020-Present

Source: Bloomberg LLC

Investors look to equity markets for signs of the health of the US economy. The close correlation of the Russell 2000 to these counterparts, particularly the Nasdaq-100, strengthens its role as a potential economic indicator.

The annual Russell Reconstitution provides numerous opportunities for market participants to trade and state their opinion about US equity markets, and CME Group’s suite of Russell Index futures provides convenient and cost-efficient tools for hedging that exposure.

Amid these sectoral swings, investors have been utilizing the small cap futures market at near record levels, seeking vehicles to enhance portfolio performance and manage market risk.  Average daily volume (ADV), for E-mini Russell 2000 futures, for the first half of 2021 exceeds 200,000 contracts just 2% below last year’s record ADV as market participants have used our markets to manage small-cap equity market price risk amid significant levels of volatility and continued uncertainty. Average daily open interest for first half of 2021 exceeds 503,000 contracts.

Exhibit 8: CME E-mini Russell 2000® Index Futures –Daily Trading Volume and Open Interest

Source: CME group

The rebalance is a significant driver for investors

The annual reconstitution often leads to sizable price movements and volatility in individual company names or industry sectors. The event can create risks for investors who are tracking these indices to ensure they have minimal performance slippage versus their benchmark index. Similarly, it can create opportunities for investors seeking to benefit from the price moves which may be created from the reconstitution.

E-mini Russell 2000 Index (RTY) futures can be a cost-efficient tool for shifting risk and a convenient alternative to cash market instruments. Among RTY’s market characteristics are deep liquidity and substantial open interest ‒ two key features for anyone concurrently trading futures and cash index exposures. Provisions for exchange-for-physical (EFP) transactions, block trading, Basis Trade at Index Close (BTIC), and Trade at Cash Open (TACO) transactions ensure that multiple avenues are open to contract users for position entry and exit.

In addition to allowing market participants to hedge macro exposures or anticipated directional movements in the Russell 2000 Index, RTY futures can provide a cost-efficient vehicle to assist with market capitalization spread strategies. For example, a portfolio manager expecting small-cap stocks to outperform large-cap stocks could enter an intermarket spread strategy combining purchase of RTY futures and sale of an equivalently sized number of CME E-mini S&P 500 Index (ES) futures contracts. The CME Clearing margin spread credit is 80% (June 2021) for a position scaled to 2 RTY long (short) versus 1 ES short (long).2

RTY futures likewise can furnish users with a means to take advantage of intra-market price discrepancies.  A trader can enter a calendar spread, for example, by buying September RTY contracts and selling an equivalent exposure in December RTY contracts, if an opportune price discrepancy emerges between the two delivery months.3

The Exchange’s listings include Micro-sized Russell 2000 contracts, as well as companion options on RTY futures. Thus enabling a wide array of option spread strategies and Russell 2000 Index volatility plays. CME Group also offers futures products based on the Russell 2000 Growth Index and the Russell 2000 Value Index, potentially useful for many purposes, including cash equitization solutions and tactical asset allocation.

Investors managing assets benchmarked to the Russell 1000 Index or Russell 2000 Index, and receiving subscription and redemption flows, may find it easier to use E-mini Russell 1000 Index (RS1) futures, the Russell 1000 Total Return Index futures, the E-mini Russell 2000 Index (RTY) futures, or the Russell 2000 Total Return Index futures ‒ respectively ‒ to manage equitization of those cash flows. This may help avoid the need to trade cash index baskets with potentially volatile prices.

The annual reconstitution is one of the most significant drivers of short-term shifts in supply and demand for US equities. The use of CME Russell futures can help to mitigate risk for investors tracking the Russell 1000 or 2000 Index and aid investors who are seeking to benefit from price movements of relevant US equities.

 

To learn more about FTSE Russell Index futures, visit
https://www.cmegroup.com/trading/equity-index/us-index/ftse-russell-index-futures.html

 

References

  1. https://content.ftserussell.com/sites/default/files/2021_russell_us_indexes_reconstitution_recap.pdf
  2. Performance bonds, also known as margins, are deposits held at CME Clearing to ensure that clearing members can meet their obligations to their customers and to CME Clearing. Performance bond requirements vary by product and by market volatility levels and are subject to review and revision by CME Clearing. For up-to-date information regarding margin credits on intermarket spread positions, visit: https://www.cmegroup.com/clearing/margins/inters.html#pageNumber=1
  3. As with intermarket spread positions, potentially significant margin offsets may apply to intra-market calendar spread positions. For current information on margin credits that CME Clearing applies to intra-market calendar spread positions, visit: https://www.cmegroup.com/clearing/margins/intras.html

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