The Russell Indexes will complete their 2014 reconstitution after the market close today.
The Russell Indexes include the Russell Global, 1000, 2000, and 3000.
The reconstitution happens once a year, and basically involves adding and subtracting stocks based on whether or not they meet certain criteria.
UBS’ Art Cashin noted earlier today that due to the reconstitution, volume in the market today should, “swell significantly.”
This reconstitution will come and go without much fanfare for most stocks. But for companies on the fringe, being included in the Russell can be a huge deal.
Here’s what you need to know:
1) The Russell Indexes are stock indexes compiled by Russell Investments, which is owned by Frank Russell Co., and was just purchased by the London Stock Exchange for $US2.7 billion.
2) The most closely watched of the Russell Indexes is the Russell 2000, which houses the 2,000 smallest components of the Russell 3,000.
3) The Russell 3000 is comprised of the 3,000 largest stocks in the U.S. market.
4) The Russell 2000 is often referred to by investors as the “small cap” index and is typically more volatile than larger benchmark indexes like the S&P 500, the Dow Jones Industrial Average, and the Nasdaq composite.
5) Russell reconstitutes its indexes once a year. Many indexes, like the S&P 500 or Dow, will change their membership as companies are acquired or as companies get bigger or smaller. Russell says, “The Russell Indexes are annually reconstituted because our research has shown that this strikes a reasonable balance between accuracy and cost.”
6) Volume will be heavy, but the Russell Reconstitution doesn’t really matter. This rejiggering of a stock index is the kind of thing that traders and investment managers get into, but ultimately, it doesn’t really matter. Rich Barry of NYSE has some great commentary on just what the fuss is all about: “In the previous two years, the reconstitution day ranked in the top two busiest trading sessions, volume-wise. The Street estimates that ~$42B will trade as a result of the adjustment, resulting in one of the biggest trading days of the year in terms of dollar volume. Asset managers and investors will have to realign their portfolios to match up with the new shifts in indices, which promises to be a fun day for the floor traders down here who will be running all over the place trying to get their orders filled on the close. Remember the floor trader’s mantra, ‘commissions pay tuitions.'”
If anything funny happens in the market during the last hour, here’s your likely culprit.