By Chuck Mikolajczak
NEW YORK (Reuters) – Investors in the volatile U.S. stock market are bracing for what could be one of the heaviest trading days of the year on Friday, when FTSE Russell completes a rebalancing of indices that are tracked by billions of dollars in investor funds.
FTSE Russell updates its index constituents once a year at the end of June to better reflect the broader markets. This encourages fund managers who have benchmarked their performance against indices to adapt their own portfolios to changes. Some $12 trillion is compared to Russell’s US indices.
The resulting buying and selling tends to peak at the close of the trading session before the reconstitution is final, and some investors look to trade any price dislocation that may result. Total trading volume on the 2021 reconstitution day exceeded 16 billion shares, making it among the busiest sessions last year.
While previous rebalancings have generally gone smoothly, some investors said the event is more likely to exacerbate volatility this year, after concerns about a more aggressive Federal Reserve have hit stocks and bonds and increased market gyrations. market in recent weeks.
The benchmark S&P 500 index is down more than 21% so far this year as the Fed tightens monetary policy to rein in runaway inflation.
“The Federal Reserve is raising interest rates, we’re seeing liquidity dry up, and while there’s plenty of cash in the stock market, certainly with negative sentiment it’s going to be a harder story to get that rebalancing,” said Rob Haworth, senior investment strategist at US Bank Wealth Management in Seattle.
One of the biggest changes this year will see Meta Platforms, formerly Facebook, move into the Russell 1000 Value Index, normally the domain of companies perceived to be trading at a discount to their fundamentals. At the same time, energy stocks will receive a higher weighting in the Russell 1000 Growth Index, after a breakneck rally over the past year.
Meta’s move to the Russell 1000 value index follows a more than 50% drop in the social media giant’s shares this year on company warnings of falling revenue after a decade of breakneck growth. .
The change will see the weight of the communication services sector in the Russell 1000 Growth Index fall from 9.9% to 8%, while strengthening the sector’s weight in the Russell 1000 Value Index from 6.9% to 8.7%, according to Jefferies.
Meanwhile, the stellar performance of the energy sector will lead to a greater weighting of energy stocks in Russell’s growth indices, Jefferies said.
The energy sector, which has risen almost 40% since last year’s reconstitution thanks to a sharp rise in crude prices, will see its weight increase to 1.7% in the Russell 1000 growth index, from 0, 6%.
The move is even more pronounced in the Russell MidCap Growth Index, where energy has a weight of 5.1%, up from 3.3%.
“Growth managers who haven’t had to pay attention to energy for several years now need to pay attention to the sector,” said Steve DeSanctis, equity strategist at Jefferies in New York.
Given the volume of trading and the number of shares involved, FTSE Russell takes steps to be transparent about the listing rules. This begins in May on its “range day,” which determines the market cap bands a stock must be in for inclusion. Subsequent steps include preliminary lists of additions and removals from the indexes.
“We don’t want to make unnecessary changes, any change in methodology is considered,” said Catherine Yoshimoto, director of product management for Russell US indices at FTSE Russell. “We are looking at where there may be future improvements, but the goal is definitely to keep it stable.
(Reporting by Chuck Mikolajczak; Editing by Cynthia Osterman)