Index provider FTSE Russell finalizes its annual index reconstitution today, making for brisk trading activity as well as some changes for some well-known exchange traded funds.
Each year on the final Friday of June, “stocks are added or deleted to the Russell 1000 large cap and Russell 2000 small cap, prompting fund managers to adjust their portfolios to reflect new weightings,” reports Reuters.
What Happened
The iShares Russell 2000 ETF IWM, the largest small-cap ETF, tracks the aforementioned Russell 2000 Index. As of June 20, the technology and health care sectors combined for nearly 35 percent of IWM's weight, representing two of the ETF's top three sector allocations.
That could change because small-cap health care and technology stocks have been primary drivers of this year's small-cap resurgence, one that has seen IWM gain about 12 percent.
Why It's Important
Stocks graduating from the Russell 2000 Index could find their way to the Russell 1000 Index, which is tracked by the iShares Russell 1000 ETF IWB. IWB is already heavy on technology and health care names with those sectors representing 25.61 percent and 13.38 percent, respectively, of the fund's weight.
The iShares Russell 1000 Value ETF IWD devotes 14.51 percent of its weight to health care stocks and 9.25 percent to technology names.
As a growth ETF, it's not surprising the iShares Russell 1000 Growth ETF IWF has a substantial tech weight at 40.12 percent. IWF's health care allocation is 12.44 percent.
The additions and deletions can sometimes add volatility to these funds, as TD Ameritrade Chief Market Strategist JJ Kinahan noted.
“You may see somewhat odd movement in ETFs like IWN; it would be similar to what you should’ve been aware of on an options expiration or last week with the quadruple witch," he said. "You have large amounts of orders coming in and out, so it wouldn’t surprise me if there was some added volatility.”
What's Next
The Russell reconstitution promises to bring increased volume Friday.
“Last year’s reconstitution is estimated to have resulted in total turnover of $50 billion,” according to Reuters. Estimates for this year range from $54 billion to $62 billion in increased volume thanks to the Russell reconstitution.
IWB and the small-cap IWM have a combined $70.24 billion in assets under management.
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