Catherine Yoshimoto
- Alphabet, Meta, and the "Magnificent Seven" maintain their 100% growth status, significantly increasing the Technology sector's weight in the Russell 1000 Growth Index to 59.7%.
- The Health Care, Consumer Discretionary, and Industrials sectors are moving from growth to value, affecting their weights in both the Russell 1000 Growth and Value Indexes.
- In the Russell 2000 Growth Index, Technology's weight decreases while Health Care sees an increase. Industrials show a notable style shift between the Growth and Value Indexes.
On May 24, we released preliminary index additions and deletions in advance of this year’s recon day as well as a summary of this year’s changes, giving market participants a preview of Russell US Style Index changes.
Here we take a brief look at how Russell recon works and highlight several noteworthy style stories, including interesting dynamics in the Technology industry.
Assigning style weights with an objective methodology
Each year, our Russell recon process involves reevaluating companies in our Russell US Indexes to determine where they lie along the investment styles spectrum. We calculate Russell 1000® and Russell 2000® Growth and Value Index constituent weights and apply banding to limit turnover during the reconstitution.
Constructing the Russell 1000 Growth and Value Indexes
As shown, we use three main variables in our methodology—one value and two growth metrics—to calculate a composite value score (CVS) for each Russell 1000 Index constituent.
We then rank the stocks and apply a probability algorithm to determine style index membership weights, where half of the market value of the Russell 1000 Index is allocated to growth, and the other half to value. If constituent data is missing or the book-to-price value is negative, we substitute the company’s score with the average for its Industry Classification Benchmark (ICB) group.
| Russell Style methodology variable | |
|---|---|
| Growth | Value |
| IBES 2-year forecast medium-term growth | Book-to-Price (BP) |
| Historical 5-year sales per share growth | |
It’s also important to note that some stock characteristics don’t allow for absolute style distinction, and in these cases—which typically represent about 30% of the index market value—we allocate portions of the company’s market cap to both growth and value. Since the Russell 1000 Index is the sum of the Russell 1000 Value and Russell 1000 Growth indexes—and the same is true for the Russell 2000 and its style indexes—constituent market cap is never double counted.
“Magnificent Seven” stocks stay pure growth
During last year’s recon, tech giants Alphabet and Meta made headlines when both companies shifted back from partial value to pure growth. Based on this year’s preliminary list of recon changes for our large cap style indexes, Alphabet and Meta would each remain 100% growth, along with the other companies which make up the group known as the “Magnificent Seven” (Microsoft, Apple, Nvidia, Amazon.com, Tesla).
Technology industry widens its lead in large cap growth
With the mega-cap Magnificent Seven delivering strong performance, Technology would remain the largest industry in the Russell 1000 Growth Index—and is poised to add to its weight. As shown, the Technology industry’s weight would climb more than six percentage points to reach 59.7%, the largest increase in weight for any industry in the index.
potential industry style shift for large caps
Source: FTSE Russell. Based on preliminary 2024 Russell Reconstitution additions and deletions. Please see the disclaimers for important legal disclosures.
The Health Care, Consumer Discretionary, and Industrials industries would exhibit the most significant style shifts from growth to value, increasing their weights in the Russell 1000 Value Index, while their weights in the Russell 1000 Growth Index would decline.
Small cap sees Technology shrink and Industrials change its style
While preliminary changes to the Russell 1000 Growth Index indicate the Technology industry would see a notable weight increase, the small-cap growth counterpart would see an opposite effect, with the Technology industry expected to decline 4.1 percentage points to 17.9% in the Russell 2000 Growth Index.
potential industry style shift for small caps
Source: FTSE Russell. Based on preliminary 2024 Russell Reconstitution additions and deletions. Please see the disclaimers for important legal disclosures.
A closer look at potential constituent membership changes sheds light on the Technology companies driving this dynamic. Super Micro Computer, for example, would count as the largest deletion by weight from the Russell 2000 Growth Index—and it would be the largest addition by weight to the Russell 1000 Growth Index. MicroStrategy would be another example of a tech firm departing the Russell 2000 Growth Index destined in part for the Russell 1000 Growth Index.
| Largest Russell 2000 Growth Index deletions by weight as of 4/30/24 | ||
|---|---|---|
| Security | Weight | Destination |
| Super Micro Computer Inc | 3.56% | Russell 1000 Growth Index |
| MicroStrategy Inc | 1.29% | Russell 1000 Growth Index Russell 1000 Value Index |
| Comfort Systems USA Inc | 0.89% | Russell 1000 Growth Index |
| Weatherford Intl PLC | 0.72% | Russell 1000 Growth Index |
| e.l.f. Beauty Inc | 0.71% | Russell 1000 Growth Index |
Source: FTSE Russell. Based on preliminary 2024 Russell Reconstitution additions and deletions. Please see the disclaimers for important legal disclosures.
In the Russell 2000 Value Index, Utilities would see the highest industry weight increase, growing 1.3 percentage points to 5.3%. Financials would remain the largest industry, with a small uptick in weight from 24.6% to 25.1%.
The Industrials industry would experience a noteworthy style shift, with a decrease in weight in the Russell 2000 Value Index and an increase in the Russell 2000 Growth Index.
An evolving reflection of style
Every year, professional money managers, brokerage houses, and other market participants closely track the constituent style classification shifts that result from our Russell recon. As we commemorate 40 years of the Russell US Indexes, the recon serves as an appropriate reminder that companies, industries, and equity markets are continually changing—and we design our methodology to ensure our style indexes continue to reflect the evolution.
Please see our Russell Style Index methodology and Russell Reconstitution homepage for more information.
Disclaimer
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