By Catherine Yoshimoto, director, product management
Last Friday we announced preliminary changes to the Russell US Indexes for our 33rd annual Russell Reconstitution. More than $10 trillion is benchmarked to these indexes—and the annual “Russell Recon” is critical to ensuring they accurately represent the ever-changing US equity market.
Every year in June, all eyes are on the reconstitution not only in the interest of rebalancing assets that track them, but also for the story it tells about the preceding year in US equity markets. And while the 2020 reconstitution narrative was largely about divergent markets where small caps got smaller and large caps got bigger, the 2021 story is about widespread market recovery across all size segments.
Breakpoint between large and small cap reaches all-time high
Redefining the breakpoints between the indexes’ large and small cap segments is a key function of the annual reconstitution—and the outcome of this exercise is often central to the plot of the Russell Recon story.
In 2021, the breakpoint between the Russell large cap and small cap size segments climbed to its highest value ever, bouncing back from the slight dip it took in 2020 to reach $5.2 billion. This marks an increase of over four times the breakpoint in 2009, when the reconstitution reflected the aftermath of the Global Financial Crisis.
Rising tide of the recovery lifted all boats
Perhaps the most evident reason behind the breakpoint increase is strong US equity market performance. After the onset of the pandemic roiled markets in March 2020,the Russell 1000 Index, the Russell 2000 Index, and the Russell Microcap Index all recovered to deliver strong returns for the year ending May 28, 2021. As shown, the Russell 1000 rose 42.7% and the Russell 2000 surged 64.6% for the one-year period. The Russell Microcap surged even higher, with a return of 82.7% for the same one-year period.
While the Russell 2000 posted higher returns than the Russell 1000 for the one-year period ending May 2021, it’s worth noting that the Russell 2000 fared worse than the Russell 1000 during the March 2020 downturn. It subsequently lagged the Russell 1000 until the fourth quarter of 2020, when small caps rallied to end the year in a near dead heat with large caps. And the Russell Microcap benefited from an early 2021 rally, bolstered by the January Reddit trading craze.
Increase in equity issuance also put upward pressure on the breakpoint
A closer look at the preliminary list of additions to the Russell 3000 Index and Russell Microcap Index also tells the story of increased equity issuance—another reason behind the record high breakpoint. For the 2021 reconstitution, we anticipate adding five IPOs to the Russell 1000, 38 IPOs to the Russell 2000, and 11 IPOs to the Russell Microcap Index (net of the Russell 2000).
In addition to these IPOs, new names in the indexes are expected to include de-SPACs, direct placements, new listings on exchanges, country reclassifications, and companies that newly meet our voting rights criteria. And while the US equity market recovery has been widespread since the last Russell Recon, additions will also include some relative outperformers, while deletions will include some relative underperformers.
A year-over-year comparison of additions and deletions sheds light on how the story shifted from divergent markets to rapidly growing markets. On a net basis (additions minus deletions), the Russell 3000E will add 466 companies (as of June 4, 2021), compared to net deletions of 56 companies in 2020.
The next chapter of the story begins after market close on June 25
As with every year, this year’s Russell Recon captures new and growing securities to accurately represent the true opportunity set for each US equity size and style segment. The shift in breakpoints effectively captures the preceding year’s market changes—and the record high breakpoint of 2021 tells the story of expanding Russell index coverage to reflect a growing US economy.
For this year’s reconstitution, we’ll be providing updates on June 11 and 18, and the newly reconstituted indexes will take effect after close on June 25. Please see our announcement for more details on the 2021 reconstitution timeline.
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