Market participants are girding for probably the biggest trading event of the year next Friday, as FTSE Russell stages the final reconstitution of its indexes, and trillions of dollars in investments could be influenced by the event that will reflect a wild trading year marked by the pandemic and the “meme” stock craze.
On the last Friday every June, FTSE Russell refreshes the components in its range of indexes, such as the Russell 2000 index of small-cap stocks and Russell 1000 index of large-cap names. Together they make up the Russell 3000 index. There are also style indexes such as the Russell 1000 growth and Russell 2000 value.
It is often the heaviest trading volume day of the year, as investors and fund managers scramble to buy or sell shares to dozens or even hundreds of companies to reflect changes in indexes. Many this year will be watching “meme stocks” like GameStop or AMC Entertainment whose value soared. Companies that went public through mergers with a Specialty Purpose Acquisition Company (SPAC) will also be on the radar.
As of the end of 2020, about $10.6 trillion in investor assets was benchmarked to Russell’s US indexes, according to FTSE Russell.
While FTSE Russell has occasionally tweaked its rules for inclusion in its indexes, such as allowing companies with multiple share classes to remain in or be permitted for inclusion, this year’s reconstitution has no methodology changes.
“Our policy team obviously regularly talks to the market participants and our committees and there were no new rules identified that were needed,” said Catherine Yoshimoto, FTSE Russell Director of Product Management.
Market capitalization for the Russell 3000 index vaulted from $31.4 trillion in 2020 to $47.7 trillion as of Russell’s “rank day” on May 7, 2021.
Stock market volatility took the index on a wild ride in the past two years. In early 2020, stocks sold off when the pandemic hit but then rebounded late in the first quarter to remain about flat from the previous year. This year the market cap for the index surged as stocks have rebounded along with vaccine distribution and a reduction in pandemic-induced lockdowns.
“It’s more assets, more appreciation, you’ve got some stocks that have gotten bigger weight changes so they are going to see more trading volume because there is jumping around, so this is a bigger trade this year than it has been in previous years” said Steve DeSanctis, equity strategist at Jefferies in New York.
The market cap breakpoint Russell uses to determine inclusion in the large-cap Russell 1000 or the small cap 2000 also increased to $5.2 billion in 2021 from $3 billion in 2020.
Perhaps no group of stocks exemplified the pandemic trading environment more than the so-called “meme stocks” such as GameStop and AMC Entertainment.
Shares for those companies had languished and even been shorted by many institutional investors due to poor fundamentals. They took off like a rocket as retail investors using commission-free trading services looked for places to invest government stimulus checks.