Every year, FTSE Russell reconstitutes its U.S.-focused family of indices to more accurately reflect current market conditions. Although initial public offerings can be added to these indices on a quarterly basis, this annual refresh is a much more comprehensive effort with significantly greater impact on the market. Changes in market capitalization, sector weightings, and style orientation will all be reflected as part of this yearly reconstitution.

There are several key dates for the reconstitution process. May 8 was “ranking day,” when U.S. companies are ranked by market capitalization in order to determine eligibility for the reconstitution. On June 5, the preliminary reconstitution portfolios were released to the public. This includes any additions and deletions to the indices. Any additional updates were posted every Friday in June. On June 26, the list became final and on Monday, June 29, the equity markets will open with the newly reconstituted Russell U.S. indices.

This year’s reconstitution is considered a major event given the volatility that occurred during the first quarter of 2020. As investors have steadily increased their exposure to passive equity instruments, the amount of assets that either track or are benchmarked to the Russell indices has also increased. FTSE Russell estimates that over $9 trillion in assets (active and passive combined) are either benchmarked to or track its U.S. indices.

While the overall market capitalization of the U.S. market (as measured by the Russell 3000 Index) did not change drastically, there have been larger trends in large cap versus small cap companies. The market cap of the Russell 3000 index fell from $31.7 trillion last year to $31.4 trillion this year. The market cap breakpoint, which separates small caps and large caps, has decreased by more than 16% to $3 billion in 2020. The smallest U.S. company within the Russell 2000 fell below $100 million for the first time since 2009. In short, big companies continue to get bigger while small companies have gotten smaller. This largely reflects the “safe haven” perception of companies with larger market capitalizations relative to smaller cap peers.

At the top of the market cap range, the largest companies continue to get more concentrated. In fact, the top 10 names in terms of market cap have increased by 23.3% since the 2019 reconstitution. However, there was some turnover at the top, with Walmart and Procter & Gamble replacing JP Morgan and Exxon within the top 10. This reflects some of the struggles that financial institutions and energy companies have recently faced.

From a sector perspective, Health Care companies and Technology companies have performed better in the COVID-19 environment given the shift to working from home for many employees. This is also reflected in the reconstitution results, with 16 of the 35 companies “graduating” from the Russell 2000 to the Russell 1000 index classified as Health Care. Examples include companies such as Teladoc Health and Acadia Pharmaceuticals. Sixteen companies that are new to the Russell U.S. Indices universe are joining the Russell 1000 index, including Zoom Video Communications and Pinterest.

The Russell reconstitution typically results in one of the largest trading volume days of the year. Given the elevated amount of movement within the indices, we expect this year to be no different. The reconstitution does create an elevated level of risk, and institutional investors should ensure that the performance of their asset managers tracking these indices or benchmarked to them remains within an acceptable band relative to the relevant index.