Russell Index Reconstitution

Russell announced that it is making some modifications to the way it is reconstituting its indexes on an annual basis.  Below are the three major changes:

  1. Date Change – To ensure the Russell reconstitution date doesn’t fall on directly before a long U.S. holiday weekend when market liquidity is low, the reconstitution will take typically take place on Friday the week before the long weekend.  In 2007, it will take place on June 22nd.
  2. U.S. BDI’s Now Eligible for inclusion - Russell has expanded its U.S. company definition to best reflect the U.S. manager opportunity set. Now eligible for inclusion are U.S. Benefit Driven Corporations or companies which are domiciled and traded primarily in the U.S., but incorporated in other countries in order to receive certain tax, operational, political or financial market benefits.
  3. Capitalization Banding – Russell has enhanced its reconstitution process without diminishing market representation.  The implementation of percentile banding reduces membership changes and index turnover by allowing members which have not changed significantly in size to remain members of their existing index.

Although the changes are relatively minor, it appears as if Russell is to attempting to better reflect the current investment environment by making these adjustments. 

Changing the date to a trading day where there is more liquidity in themarket will provide better stability and lower the chance for a big move in the indices, especially in the Russell 2000.  Since index funds must manges accordingly, they tend to trade on the same day which can cause wictuations in share prices – increasing for those being added to the and decreasing for those being deleted from the index.

Adding BDI’s is also beneficial as it increases the opportunity set of investments.  Many companies whose revenue is primarily generated in the U.S. have moved their operations outside the U.S. to increase shareholder value.  For actively managed funds who aim to have low tracking error there are now more companies to select from for
investment.

Adding a “banding” to the capitalization ranges will reduce the turnover of companies in each index.  This is advantageous for taxable investors as investments in index funds will have fewer taxable transactions with the decrease in turnover.

For more information about Russell Indexes please go to: http://www.russell.com/