Analyzing the Russell Indexes Last Annual Reconstitution

On Friday, June 27, we will see the last annual Russel Reconstitution before the index provider switches to reconstitutions twice a year. We’ve covered before that, typically, Russell Reconstitution Day is the biggest close of the year. Last year was no different — $220 billion in U.S. stocks traded on Nasdaq and New York Stock Exchange in the closing moments of trading on June 28, 2024. 

It’s likely that tomorrow we’ll see near $200 billion trade around the close as index tracking funds buy Russell U.S. Index additions and sell deletions. FTSE estimates $8.5 trillion benchmarked to the Russell indexes with $2 trillion in passive tracking. 

With the substantial amount of dollar tracking, Russell Indexes are quite important for companies and mutual fund investors. The Russell 3000 Index (made up of the Russell 2000 small-cap index and Russell 1000 large-cap index) is a major U.S. markets benchmark. Companies included in the index tend to have higher turnover, lower trading costs and a solid base of long-term institutional investors through index tracking funds. 

Getting into a Russell U.S. Index

According to Russell, this year, 228 companies are being added to the Russell 3000 index. The reconstitution process started on April 30, with Rank Day or the day the index provider evaluated which companies are  eligible for which indexes. 

Table 1 shows the rules each company in the Russell U.S. Indexes universe must pass to be added. 

After determining eligible securities using the above rules, FTSE Russell assigns them to the 1000, 2000, 3000 and 3000E (the largest 4000 eligible U.S. stocks) indexes based on market cap rank.

This year the:

• Russell 2000 will have 211 additions and 155 deletions. Notable additions include CRSP, XENE, GENI, and INDV. There will also be 44 migrations between the Russell 1000 and 2000 in total.
• Russell 1000 will have 18 additions and no deletions. Additions include FLUT, FLEX, TLN, and TEM. The smallest addition this year is KRMN with a market cap of $6.2 billion. Interestingly, eight of the additions are incorporated outside the U.S. — six have headquarters outside the U.S., and five are both incorporated and headquartered abroad. 

Not all U.S. companies are incorporated and headquartered in the States

There are around 200 Russell constituents that are incorporated outside the U.S. and about 130 headquartered abroad. Chart 1 shows the percent of “foreign” companies in the Russell 3000 index. 

Chart 1: “Non-U.S.” Russell 3000 Constituents

While that might be surprising for an index that benchmarks the U.S. market, FTSE Russell has clear rules for evaluating “foreign” listings to make sure they’re representative of the U.S. market. 

First, a company must be listed on a U.S. exchange and file with the SEC. But when a country has a dual foreign listing, or offshore incorporation, or headquarters in another country, the Russell looks at other data to see if the company looks American:

• First, they look for 20% more assets in the U.S. than in any other country.
• If that’s not reported or inconclusive, they look for 20% more revenue coming from the U.S. than any other country.
• And if that’s not conclusive, there are more tests (call us for details).

It can get complicated, but one thing that makes Russell different from S&P is that it is rules-based (not subjective).

Addition is good for companies 

Importantly, addition to a popular U.S. index is good for companies. It provides new index investors, who are typically long-term holders. It also boosts demand for shares by active institutional investors who will be underweight in the newly added stock. 

It is these index funds that trade on the reconstitution date, mainly because their investors expect very low tracking error, requiring the funds to closely match the index changes. In Chart 2, we use market on close trades and echo prints for a behavioral estimate of how many shares are actually traded on rebalance day by index tracking funds. 

• Large caps can have 21% of their float held by Russell 1000 and S&P 500 index tracking funds, up to 28% if it’s also in the Nasdaq-100®.
• Small caps could have 10% of their float held by Russell 2000 tracking funds, up to a total of 27% if they’re also in the S&P 600. 

Chart 2: Index tracking funds could own around 25% of float shares in many companies

Because index addition increases active fund, hedge fund, and other liquidity provider demand, we tend to see liquidity overall increase long after the index addition. In Chart 3, we see the new Russell 2000 Index additions’ liquidity increase up to five months before the reconstitution. The liquidity increase before reconstitution is likely attributed to a popular trade for hedge funds – buy index additions before the reconstitution and sell them to index funds.

More importantly, liquidity remains elevated after the reconstitution, showing the increased demand stays long term. Some likely come from active funds trading like closet indexers, but thanks to index addition the company benefits from reduced information asymmetry about their stock, and lower cost of capital from the pre reconstitution liquidity boost. Plus, the increase in demand from index buyers can also boost a stock’s price. 

Chart 3: Liquidity increases months before Russel reconstitution and stays elevated after

Long-term liquidity improvements lower the cost of trading in a stock, make it easier for companies to raise capital, and quicker for investors to complete large trades. 

Semi-annual Russell Reconstitution 

In 2026, Russell U.S. Indexes are moving to twice a year reconstitutions in June and November. The new structure will have reconstitutions for: 

• Russell U.S. Size Indexes and Russell U.S. Style Indexes on the last Friday in June.
• Only Russell U.S. Size Indexes on the second Friday in November.

The change gives companies a chance for inclusion twice a year instead of once, a welcome update for issuers hoping to get into an index. It’s likely the November reconstitution will be smaller than June, but we will see next year how the change impacts Russell reconstitution day trading volumes.