Skip to main content

You are here

Blog Listing Page

The fastest billion: Russell reconstitution redefines small caps – yet again

By: Mat Lystra, Senior Research Analyst

The Russell 1000 Index of large cap companies and the Russell 2000 index of small cap companies are re-assessed annually with Russell Indexes’ Reconstitution. This year, the dividing line in market capitalization between large and small cap reached $3.2 billion. Although in a broad sense that number might start to redefine what constitutes a small cap company, it is perhaps unremarkable considering last year’s threshold was $3.1 billion. The speed with which we reached these heights, however, is something worth looking at more carefully. 

Consider that after the Russell 2000 Index launched in 1984, it took 12 years for the dividing line to reach $1 billion. It took only 10 years to reach the next billion, establishing a mark of $2 billion in 2006. The worst financial crisis since The Great Depression dragged the boundary all the way down to $1.2B in 2009. But despite this, it took only eight years to reach the next billion in 2014. 

Notice the pattern?  If this trend was to continue (which no one can predict, of course) it would take only six years to hit the mark of $4 billion, in 2020. As illustrated below, a simulation modeling the historical growth of the dividing line between the Russell 1000 and Russell 2000 indexes suggests the potential for even faster growth. 

Speed of the next billion in market cap threshold between the Russell 1000 and Russell 2000 has accelerated historically

 Source: FTSE Russell, data as at May 30, 2015. Past performance is no guarantee of future results. Please see the final page for important legal disclosures.

The Reconstitution of Russell indexes revaluates changes in the market on an annual basis to maintain the integrity of our benchmarks without introducing unnecessary turnover costs. The indexes’ dividing line between U.S. large and small companies is closely watched as a gauge of market growth.

Such a rapid climb in the large/small dividing line in the next few years, as illustrated in the chart above, seems unlikely but surely the same could have been said in the dark days of early 2009.  For now all we can do is wait and see. However, if in 2020 we do reach a $4 billion boundary, then conventional wisdom—both with respect to valuations and how to define a small cap company—will need to be redefined. 



© 2015 London Stock Exchange Group companies.

London Stock Exchange Group companies includes FTSE International Limited (“FTSE”), Frank Russell Company (“Russell”), MTS Next Limited (“MTS”), and FTSE TMX Global Debt Capital Markets Inc (“FTSE TMX”). All rights reserved.

“FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®” and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication.

Neither the London Stock Exchange Group companies nor any of their licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put.

The London Stock Exchange Group companies do not provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. The London Stock Exchange Group companies make no representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the London Stock Exchange Group companies. Distribution of the London Stock Exchange Group companies’ index values and the use of their indexes to create financial products require a license with FTSE, FTSE TMX, MTS and/or Russell and/or its licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.


Blog Listing Page