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Defensive or dynamic among Russell 1000 top ten

By: Catherine Yoshimoto, Director, Product Management

The annual reconstitution of the Russell US Indexes, when eligible companies are re-ranked and assigned to their respective indexes, was completed on June 25, 2018. A key component of the reconstitution is the recalculation of style and stability probabilities for each company in the index. This year’s recalculations shed light on how our methodology reflects the changing fundamentals of the largest Russell 1000® Index constituents.

The term “probability” is used to indicate the degree of certainty that a stock is growth, value, defensive or dynamic, based on a number of fundamental metrics.[1] This method allows stocks to be represented as having characteristics that fit more than one style or stability category, while preserving the additive nature of our indexes.

The chart below is a representation of the combined style and stability probabilities of the 10 largest companies in the Russell 1000 Index after the 2018 recon recalculation. The companies are sorted from largest to smallest weight.

In a year when technology company growth captured news headlines, it's not surprising that Apple remained 100% Growth in the Russell US Style Indexes in 2018. Given the relatively high volatility of its stock price over the previous 1- and 5-year periods, it's also not surprising that Apple moved to fully Dynamic (from 40% Defensive) in the Russell US Stability Indexes® despite relatively defensive return on assets and earnings variability metrics. and Facebook were also 100% Growth-Dynamic as of the 2018 Russell reconstitution.

However, we can see some variation in style and stability probabilities among the largest 10 companies in the Russell 1000 Index, even within the technology sector. For example, while Microsoft and Alphabet are primarily Growth, their 2018 probabilities were calculated as more Defensive than Dynamic. Microsoft is 100% Defensive due to defensive return on assets and relatively low 1-year stock volatility. Alphabet is 90% Defensive due to relatively defensive return on assets, earnings variability and leverage scores.

In terms of Value companies, Exxon is 100% Value-Defensive and Bank of America is 100% Value-Dynamic, while JP Morgan Chase & Company is 100% Value but 50% Defensive and 50% Dynamic. Exxon is 100% Value due to book-to-price and 5-year sales per share growth and 100% Defensive due to the relatively low volatility of its stock price and low leverage. Bank of America and JP Morgan Chase & Company both have relatively high leverage, which is typical of banks and similar financial institutions.

With approximately $6.5 trillion in assets under management benchmarked to them, the Russell US Style Indexes continue to be a vital part of the index ecosystem, and annual reconstitution ensures that the series continues to accurately reflect the market. The Russell US Stability Indexes add another perspective to US companies that may be an interesting addition with the return of higher volatility to the markets.

To learn more about our methodology and to read the latest research, visit the Russell US Index Reconstitution page.



[1] For additional details on the index construction methodology, refer to: Construction and Methodology


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