By Catherine Yoshimoto, Director, Product Management
FTSE Russell adds eligible initial public offerings (IPOs) to our Russell US Indexes on a quarterly basis, ensuring that the indexes are always an accurate reflection of the markets they’re designed to represent. Each quarter, the number of IPOs we add—and their industry composition—offer us insight into IPO activity in the post-pandemic era. In Q3, IPO additions reached their highest in a decade, with a total of 94 names added to the Russell 3000E—over half of which were Health Care companies.
Why adding IPOs can’t wait for the annual Russell recon
Each quarter, we review companies filing IPO registration statements to assess whether they meet certain criteria—such as size, liquidity, and float requirements—to be included in the US Russell Indexes. This process has resulted in the addition of over 1,489 IPOs to the Russell US indexes over the past decade.
We also add eligible IPOs to our Russell Indexes as part of the annual Russell reconstitution process, but we don’t believe this is frequent enough. Instead, we focus on adding IPOs each quarter to reflect market additions between reconstitution periods—ensuring that our indexes are an ongoing representation of the institutional opportunity set. Note: Russell Indexes moved from adding IPOs at reconstitution to quarterly IPO additions in September 2004.
Lags in adding eligible stocks to an index can also make a material difference in performance. As I’ve blogged about previously, delaying a company’s addition to an index can come at a great opportunity cost—and has the potential to meaningfully impact index performance.
Q3 IPO additions reach a 10-year high
IPO activity has ebbed and flowed over the past decade, where in some quarters we’ve added just a small handful of stocks to our Russell Indexes, and in others we’ve added significantly more. As shown below, the third quarter of 2021 was one such instance, where IPO additions to the Russell 3000E Index spiked to 94 new names—the highest in 10 years by a wide margin. It’s also worth noting that we add stocks on the basis of total market cap ranking within the market-adjusted capitalization breakpoints established during the most recent reconstitution, and the majority tend to be added to the Russell 2000 Index—the small cap segment of the Russell 3000E Index.
Health Care IPOs are behind the surge
If we take a closer look at industry classification for the Q3 IPO additions, we can see that they’re not evenly distributed across ICB Industries. Of the 94 IPOs added to the Russell US Indexes in the third quarter, 49 were Health Care companies, of which 40 were Biotechnology companies. One such example is Adagio Therapeutics, Inc., which focuses on the discovery, development, and commercialization of antibody-based solutions for infectious diseases with pandemic potential.
As shown, while Health Care companies have historically represented a significant share of IPO additions, this has been particularly true since the onset of the pandemic.
If we go back even further and look at the entire US Health Care IPO landscape, we can see that the uptick in Health Care IPO additions is part of a broader, longer-term trend. As shown, when comparing YTD through October time periods since 1980, the number of US Health Care IPOs have hit an all-time high in 2021.
While Health Care companies led the charge in IPO additions, several other industries made a noteworthy contribution to the Q3 surge. Consumer Discretionary added 17 companies across the Russell 3000E, while Technology added 11 companies and Industrials added five. Notable added names within these industries were Traeger, Inc.—the creator and category leader of the wood pellet grill—and LegalZoom.com, Inc. These are perhaps examples of companies benefiting from shifting lifestyles in response to the pandemic, such as more outdoor leisure time and higher demand for remote services.
Reflecting the opportunity set while gleaning IPO activity insights
We believe indexes are only useful to the extent that they accurately reflect the opportunity set they’re designed to represent. If we only added IPOs to our Russell US Indexes once a year during our reconstitution, in Q3 this would have delayed the addition of a significant number of stocks—and could also have impacted index performance.
The quarterly addition of IPOs not only enhances index representation, but also offers a snapshot of IPO activity across industries—and how many of the rising companies are those meeting the needs of an economy that’s been reshaped by the pandemic.
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