Catherine Yoshimoto
- Examine the criteria for company structures, share types, minimum free float, and voting rights required for inclusion in the Russell US indexes.
- Understand the requirements for IPOs to be eligible for inclusion in the Russell US indexes, including pricing/trading by the rank day.
- Learn how companies are ranked by size and how index breakpoints determine membership in the Russell 1000® and Russell 2000® indexes.
For over forty years, the Russell US indexes have mapped the composition of the investable US equity market using a simple, transparent and consistent approach.
But how does a company get into the Russell 1000® or Russell 2000® index? In fact, one of the questions we’re most often asked by C-suite executives is: “How can my company join the Russell US Indexes?”
Unlike some other popular US equity indexes, there’s nothing subjective about the inclusion criteria for this index series. There’s no committee deciding who joins. If you meet the eligibility rules, you qualify.
Nationality
What makes a US stock? In an era when many companies have multiple legal entities and operate internationally, it’s often tricky to determine their nationality.
A corporation may be incorporated in one place, have its headquarters in another country, be tax-resident elsewhere and have its assets and revenues spread out across the world.
Here’s how we define nationality for the purpose of our US equity indexes.
If a company is incorporated in, has its headquarters in and its shares are traded on a standard exchange[3] in the same country, it’s assigned that country’s nationality.
Microsoft, for example, is incorporated in and headquartered in Washington State in the US. Its shares are traded on the Nasdaq stock exchange, based in New York. So, it’s clearly a US stock for the purposes of the Russell US equity indexes.
However, if any of the above three criteria (country of incorporation, country of HQ, existence of share listing in that country) do not match, we conduct a series of checks, the full details of which can be read in our index ground rules.
The general idea is to define three indicators of nationality (which we call home country indicators, or “HCIs”), then to cross-reference them against the location of a company’s assets or revenues. If the results are still inconclusive, the location of the company’s headquarters or of its most liquid stock exchange listing makes the final determination.
Not all index firms define nationality in the same way, so it’s worth reading this section of the index rules carefully if your company has a complex legal and operational structure.
Eligible exchange
Equities traded on the CBOE, NYSE, NYSE American, Nasdaq and ARCA exchanges are eligible for inclusion in the Russell US equity indexes. Bulletin board, pink-sheet or over-the-counter (OTC) traded securities are not eligible for inclusion, nor are securities for which prices are displayed on the FINRA Alternative Display Facility (ADF).
Minimum share price and market cap
A stock must have a closing price at or above $1.00 on its primary exchange on rank day to be eligible for inclusion (a 30-day average is used for existing index members to reduce unnecessary turnover). And a company must have a total market capitalisation of US$30 million or more on rank day to be eligible.
Company structure
The following company structures are excluded from the indexes: royalty trusts, US limited liability companies, closed-end investment companies, blank check companies, special-purpose acquisition companies (SPACs) and limited partnerships. Exchange traded funds (ETFs) and mutual funds are also excluded.
Types of shares
The following types of shares are excluded from the indexes: preferred and convertible preferred stock, redeemable shares, participating preferred stock, warrants, rights, depositary receipts, instalment receipts and trust receipts.
Minimum free float and voting rights
Companies must have a minimum 5% free float[4] to be eligible for the Russell US equity indexes. And at least 5% of voting rights (aggregated across all a company’s equity securities) must be in the hands of unrestricted shareholders.
Rank day and IPOs
The annual Russell index reconstitution takes place after the close of the fourth Friday in June. The rank day (on which index eligibility is assessed) occurs on the last business day of April.
Stocks must be listed on the rank day and FTSE Russell must have access to documentation on that date supporting the company’s eligibility for index inclusion. This includes the corporate description, the verification of incorporation, the number of shares outstanding and other information needed to determine eligibility. IPOs must price/trade by the rank day to be eligible for inclusion.
Ranking by size
On rank day, all eligible companies are ranked by their total market capitalization. The largest 4,000 become the Russell 3000E Index and the Russell 1000® and Russell 2000® indexes are formed from the Russell 3000E: the largest 1000 become the Russell 1000® Index and the next 2000 become the Russell 2000® Index.
For existing Russell 1000® and Russell 2000® members, we use a “banding” methodology near the breakpoint between the two indexes, preventing unnecessary index turnover (stocks only move between the two indexes if their market capitalization moves more than 2.5%, based on cumulative market cap percentile, from the index breakpoint).
Ranking by size and index breakpoints
Weighting, style membership and maintenance
Shares are included in the Russell indexes at their investable market capitalisation (i.e., after adjustment for any free float restrictions). At each rank day, we also calculate index constituents’ style attributes, which determine their membership of the Russell US Style indexes (these indexes represent approximately 70% of all assets benchmarked to a Russell index). Details of this calculation, as well as of how we maintain the Russell US equity indexes, are given in this Solution Overview.
Why would I want to be in the Russell US Indexes?
According to Nasdaq, “[b]eing included in an index is important for companies….Not surprisingly, [Nasdaq’s] studies of Russell inclusions show that index inclusion almost always brings new long-term investors into a company’s shareholder base and, with that, increased liquidity and trading.”
Where can I find more information about the Russell Reconstitution process?
If you are joining the Russell US Indexes during the upcoming 2024 reconstitution, you can find additional resources on our dedicated webpage, including the templates for press releases. Additions to the Russell US Indexes will be announced on May 24, 2024—see you then!
1. Source: Data as of December 31, 2022 as reported on April 1, 2023 by eVestment for active institutional funds, Morningstar for active retail mutual funds, insurance products, and ETFs, and passive assets directly collected by FTSE Russell. AUM includes blended benchmarks and excludes futures and options. AUM data does not include active and passive assets not reported to a 3rd party source or FTSE Russell. For funds where the AUM was not reported as of December 31, 2022, the previous period AUM was used as an estimate. No assurances are given by FTSE Russell as to the accuracy of the data
2. The full rules are at Russell US Equity Indices Ground Rules (lseg.com)
3. Standard exchanges are those listed in Appendix A, ‘Eligible Exchanges and Market Segments’, of the FTSE Global Equity Index Series Ground Rules, as well as the Toronto Stock Exchange venture market.
4. See Free Float Restrictions (lseg.com)
Disclaimer
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