The Landmark Overhaul of Russell Indexes
The Rationale Behind the Revision
The world’s second – largest index – compiling company, FTSE Russell, has just announced a “major overhaul” of its US growth and value indexes. This move is to limit the weights of large – cap constituent stocks, and as a result, stock funds worth over $7 trillion will face significant restructuring. On Friday local time, FTSE Russell stated in a public announcement that it will set upper weight limits for the constituent stocks of the Russell style indexes (primarily growth and value stock indexes). No single company’s market capitalization shall account for more than 22.5% in the style index, and the combined market capitalization of companies with a share of 4.5% or more shall not exceed 45% of the index. The adjustments will commence in March next year and will be carried out after each quarterly and annual review. FTSE Russell indicated that this cap mechanism was adopted after an industry consultation in August, during which “generally supportive” feedback was received. Previously, some fund clients had specifically expressed concerns about the high returns of the Russell 1000 Growth Index.
Addressing the Dominance of Big Tech Stocks
This adjustment aims to respond to the market’s concern that large – tech stocks have an overly high proportion in many investment portfolios, to the extent that they touch regulatory limits. Two months ago, S&P Dow Jones Indices, a competitor of FTSE Russell, made a similar adjustment to curb the dominance of the largest companies.
The Significance of Russell Indexes
Russell indexes use the US market as the original benchmark, and the constituent stocks must be US companies. The relevant indexes cover a wide variety of different types of stocks, providing extensive market coverage. As an investment benchmark, the Russell style indexes involve $7.2 trillion worth of stock assets, accounting for 68% of the total assets associated with all Russell indexes.
