At the end of June, FTSE Russell completed its annual reconstitution, which is designed to rebalance the indices so that they are reflective of the U.S. equity market, and, ultimately, remain appropriate vehicles for comparison. Primary changes that occur during the annual reconstitution are stock additions to and deletions from the indices, re-calibration of market cap breakpoints between stocks, and re-evaluation and subsequent characterization of the stylistic classification of stocks. This year’s changes were formally implemented after the U.S. equity markets closed on Friday, June 27, and the reconstituted indices took effect at the market open on Monday, June 30. The annual reconstitution is a highly anticipated event for two reasons:

1. Magnitude of trading: The weeks leading up to the close of the final trading day before the reconstitution are typically marked by outsized trading volumes. Leading the charge are index fund providers that like to account for changes to ensure that tracking error between fund offerings and their respective benchmarks remains within expectations.
2. Stock/sector allocation changes: While the reconstitution exercise is not meant to introduce wide, sweeping changes to the index family, additions and deletions of stocks and subsequent changes to sector weightings spur managers’ discussions on benchmark-relative positioning in their portfolios and associated risks.

Highlights of the 2025 Russell Reconstitution

The summary of changes can be found here (2025 Reconstitution Summary). The following is our view on the notable takeaways and considerations for active managers and institutional investors:

• Size and concentration remain noteworthy characteristics of the U.S. equity market. As of the latest iteration of the FTSE Russell reconstitution summary, the total market (as represented by the Russell 3000 Index) grew by 10%, driven primarily by the continued market cap growth of the top 10 holdings. Collectively, the total market cap of these holdings grew by 16%, and 7 of those 10 holdings are individually above $1 trillion in market cap. The top 10, which includes the “Magnificent 7” stocks, also did not change from the prior year (though there were some rankings changes within the group). The continued growth and unchanged composition of this group of stocks reinforces the need to evaluate active bets on the top 10 holdings because of the percentage they occupy in benchmarks (e.g., more than 50% in the Russell 1000 Growth Index) and subsequent contribution to benchmark performance. Diversification of alpha sources will also be important to ensure that performance outcomes are not concentrated.
• The Russell 1000 Value Index will have returning additions typically considered “growth” stocks. Amazon, Alphabet, and Meta will join the Russell 1000 Value Index concurrent with their membership in the Russell 1000 Growth Index. The addition of Meta and Alphabet will also increase the Information Technology allocation within the Russell 1000 Value Index to 11.2% (up by 4.7 percentage points). This is not the first time these stocks have been in the value index; Amazon was in 2014 while Meta and Alphabet were as recently as 2022.

Considerations for active managers include:

1. Exposure to the added stocks: Given the strong contribution of these stocks to the performance of the Russell 1000 Growth Index, it begs the question if their valuations, despite the partial value classification, are compelling enough for value managers to initiate a position. Weighing the impact of zero exposures to these names should they not fit managers’ valuation and fundamental disciplines for investment should also be considered.
2. Managing the increase in the Information Technology allocation: This will be an important consideration for managers with conservative guardrails around relative sector allocation on how they can close a widened sector allocation gap while remaining aligned with their underlying investment approach.

• The Russell 1000 Growth Index continues to be very concentrated. Information Technology now represents 58% of the benchmark, up from 45% in 2024. Combined with the Industrials allocation (9.3%), which tends to be a “catch all” sector and one that houses Information Technology names, the Tech segment of the benchmark is significant. The concentration points to not just the leadership of the top 10 holdings, but how broadly encompassing themes, like the artificial intelligence ecosystem, have become. As such, the importance around diversification can be re-emphasized here to ensure that portfolios are positioned to participate in different market environments. It will also be interesting to observe how the uncapped and capped versions of the Russell 1000 Growth Index, discussed here, could diverge over time.
• Palantir and Applovin’ leave the Russell Mid Cap Growth Index, creating big swings in sector allocation. Palantir and Applovin’ dominated the Russell Mid Cap Growth Index in 2024 both in weightings and contribution to benchmark performance. The combined weighting of these two stocks was nearly 10% of the benchmark, and both stocks experienced incredible appreciation in 2024 (with Applovin’ stock being up 700+%!). Many active managers did not have exposure to or only underweights to these holdings due to market cap, fundamental, or valuation reasons, creating a meaningful performance drag. The stocks’ exits will be welcomed, but the performance overhang from 2024 will impact trailing year returns to come. Also, the Palantir and Applovin’ exits will lead to a 11% drop in the Information Technology sector allocation; similar to the decrease in the Tech sector allocation will be an 8% increase in the Consumer Discretionary sector. The swings in these sectors’ allocation will, again, center a focus on managers’ ability to navigate potential gaps in allocation between their portfolios and the benchmark.