Chuck Mikolajczak. By
NEW YORK (Reuters) – Investors in volatile US stock markets are preparing for one of the heaviest trading days of the year on Friday, as the FTSE completes the rebalancing of the Russell Index that is tracked by trillions of dollars in investor funds. .
The FTSE Russell refreshes the components of its index once a year at the end of June to better reflect the broader markets. This encourages fund managers who have benchmarked their performance to the index to adapt their portfolios to changes. Some $12 trillion is benchmarked to the Russell’s US index.
The resulting buying and selling peaks at the end of the trading session before the restructuring is finalized, and some investors want to trade on any price dislocations that may result. Total trading volume topped 16 billion shares on the day of the 2021 restructuring, making it one of the busiest sessions last year.
While past rebalancing has generally gone off without a hitch, some investors said the event was more likely to increase volatility this year, with a more bullish Federal Reserve slamming stocks and bonds in recent weeks. The volatility in the market has intensified.
The benchmark S&P 500 has fallen more than 21% year-on-year, as the Fed tightened monetary policy to tame rising inflation.
“With the Federal Reserve raising interest rates, we are seeing liquidity drying up and while there is ample liquidity in the equity market, certainly with negative sentiment it is going to be a tough story to achieve that rebalancing ,” said senior Rob Howarth. Investment strategist at US Bank Wealth Management in Seattle.
In one of the biggest changes this year, meta platforms, formerly Facebook, will move to the Russell 1000 Value Index, the domain of companies typically considered to be trading at a discount to their fundamentals. Also, energy stocks will receive a higher weighting, following a blistering rally over the past year in the Russell 1000 Growth Index.
Meta’s move to the Russell 1000 price index comes after shares of the social media giant fell more than 50% this year on warnings of the company faltering revenue after a decade of furious growth.
According to Jefferies, the weighting of the communications services sector in the Russell 1000 growth index will drop from 9.9% to 8%, while the sector weighting in the Russell 1000 price index will increase from 6.9% to 8.7%.
Meanwhile, the energy sector’s stellar performance will weigh heavily on energy stocks in the Russell Growth Index, Jefferies said.
The energy sector, which has climbed nearly 40% since last year’s restructuring, will increase its weighting in the Russell 1000 Growth Index from 0.6% to 1.7%, due to a sharp rise in crude oil prices.
The move is even more apparent in the Russell Midcap Growth Index, with Energy taking the 5.1% weighting, up from 3.3%.
“Growth managers who haven’t focused on energy for many years now have to focus on the sector,” said Steve DeSanctis, equity strategist at Jefferies in New York.
Given the trading volume and the number of shares involved, the FTSE Russell takes steps to be transparent with respect to the rules of incorporation. It begins on its “rank day” in May, which determines the market capitalization band that a stock must be within for inclusion. Subsequent steps include initial lists of additions and deletions from the index.
“We don’t want to make unnecessary changes, any methodological changes are considered,” said Katherine Yoshimoto, director of product management for Russell US Index at FTSE Russell. “We’re looking at where improvements could be in the future but the goal is certainly to keep it stable.”
(Reporting by Chuck Mikolajk; Editing by Cynthia Osterman)
