2020 Russell US Indexes Reconstitution: Unlike any seen before? Jermal Chandler (Cboe Options Institute), Amy Whitelaw (BlackRock), Philip Lawlor and Catherine Yoshimoto (FTSE Russell) [[ webcastStartDate * 1000 | amDateFormat: 'MMM D YYYY h:mm a' ]] 60 mins

Total US equity market capitalization down 1%, yet market cap of ten largest US stocks up more than 23%.  Market cap breakpoint separating small-caps (Russell 2000 Index) and large-caps (Russell 1000 Index) decreases by more than 16%. Smallest US company falls below $100 million for first time since 2009. ? Technology-dominated five largest companies remain the top five, with three topping $1 trillion and Microsoft again the largest US company. 

More than ever, investors recognize the risks and opportunities associated with the low carbon transition and are incorporating a wider set of considerations, including carbon, green revenues and environmental, social and governance (ESG) assessments issues into their decision making.

It is no longer sufficient to merely improve upon a set of sustainable investment (SI) characteristics compared to a benchmark, but rather that those improvements should achieve precise outcomes. Moreover, the desire to simultaneously control other index outcomes, such as tracking error, country/ industry weights and style exposures, provides additional complications. The ability to achieve such specific requirements in an index ultimately rests with portfolio construction.

This paper shows how:

By Philip Lawlor, head of Global Markets Research

Technical measures of investor confidence (or fear) are useful tools for gauging impending contrarian shifts in equity market performance. So what are these sentiment indicators telling us now?

Our proprietary Composite Sentiment Indicator (CSI) blends four technical barometers of investor sentiment—I.e., the breadth of stock overbought and oversold Relative Strength Indicators (RSI) and the percent of stocks hitting their 52-week highs or lows—into a single Z-score. CSI scores measure the degree to which current readings are above or below their long-term averages, and range from 1 (levels deemed extremely oversold/fear) to 5 (extremely overbought/overconfidence).

Peaks and troughs tend to be brief and reverse rapidly

The chart below illustrates the sharp gyrations in world equity-market sentiment in response to the coronavirus outbreak and its economic impact. After nearly hitting a 15-year record...

Next Friday (June 26), FTSE Russell will implement their usual annual index reconstitutions.

Typically the biggest close trade of the year

In contrast to other indexes, Russell does most of its changes just once a year (most other indexes do significant quarterly changes). That’s meant to reduce turnover, reducing the impact of quarterly stock price moves that affect a stock’s rank. But it means the changes aggregate into a single, more significant event, as they have built up for an entire year.

At the end of next Friday, Russell will switch stocks between value and growth, large and small cap, add new companies and remove companies that no longer qualify. It will also update free float and shares outstanding for all constituents. There is a lot going on, and more than 3,000 tickers will be affected.

Chart 1: The Russell Reconstitution is typically the biggest market close of the year

FTSE Russell, a leading global index, data and analytics provider, rang the Nasdaq Closing Bell remotely from across the world in honor of the Russell Reconstitution. Waqas Samad, CEO, rang the Closing Bell alongside the global index provider’s team.

The Russell 2000 Index reconstitution is a major event in the US equity calendar, which presents risk management challenges for some and potential alpha trade opportunities for others. Reconstitution day is typically one of the highest trading-volume days of the year in US equity markets. Here we explore ways to manage exposure and implement trade ideas using E-mini Russell 2000 Index futures and BTIC transactions.

The Russell US Indexes are designed to reflect the ever-changing US equity market, and the annual reconstitution process is critical to maintaining accurate representation.

During this highly-anticipated market event, the breakpoints between large, mid and small cap are redefined to ensure market changes that have occurred in the preceding year are captured. Companies are also revaluated to determine where they lie along the investment styles spectrum. 

Total US equity market capitalization down 1%, yet market cap of ten largest US stocks up more than 23%.  Market cap breakpoint separating small-caps (Russell 2000 Index) and large-caps (Russell 1000 Index) decreases by more than 16%. Smallest US company falls below $100 million for first time since 2009. ? Technology-dominated five largest companies remain the top five, with three topping $1 trillion and Microsoft again the largest US company. 

Total US equity market capitalization down 1%, yet market cap of ten largest US stocks up more than 23%.  Market cap breakpoint separating small-caps (Russell 2000 Index) and large-caps (Russell 1000 Index) decreases by more than 16%. Smallest US company falls below $100 million for first time since 2009. ? Technology-dominated five largest companies remain the top five, with three topping $1 trillion and Microsoft again the largest US company. 

As we near the completion of our annual Russell US Indexes Reconstitution, major market operators Cboe Global Markets and CME Group have observed increasing levels of US small-cap market volatility and growing volume in derivatives linked to the US small-cap Russell 2000 Index.

After a relatively flat start to the year, the Russell 2000 fell 40.2% from February 24 through March 23 as global pandemic fears hit the western world. And, amazingly, the Index has now risen 37.3% from March 23 through Friday, June 12. The Cboe Russell 2000 Volatility IndexSM (RVXSM), a key measure of near-term volatility conveyed by Russell 2000 Index options prices, has reflected this dramatic shift, more than doubling its average daily closing price from 2019 (18.6) to 2020 (38.7) year-to-date as of June 12, averaging 49.8 since the beginning of March.

2020 Russell US Indexes Reconstitution: Unlike any seen before? Jermal Chandler (Cboe Options Institute), Amy Whitelaw (BlackRock), Philip Lawlor and Catherine Yoshimoto (FTSE Russell) [[ webcastStartDate * 1000 | amDateFormat: 'MMM D YYYY h:mm a' ]] 60 mins

By Philip Lawlor, head of Global Markets Research

The epic rally since late March has propelled forward PE multiples across the developed equity markets to some of the highest levels in years. Price/book value ratios have also rebounded, albeit less profoundly. In both cases, the Russell 1000 has set the pace.

Russell 1000 PE hits 15-year high and a big premium

The nearly eight-point rebound in the Russell 1000 forward PE off its March lows has far outdistanced the average five-point gain for its developed peers. At a forward PE of 21.8×, the US large cap index has not only blasted through its mid-February peak but also through its 15-year high. This is also one of the US large cap index's largest premiums to other developed markets, which have converged around 15-16×.

Regional consensus 12-month forward price/earnings multiples (×)

Source: FTSE Russell / Refinitiv. Data through June 15, 2020. Past performance is no guarantee to future...

(Yicai Global) June 23 -- Global index, analytics and data provider FTSE Russell has completed the first-phase inclusion of China's domestically traded A-shares into its global equity indexes. Plans for added phases will be based on future market developments, it said today.

After the first phase of inclusion, the firm added 25 percent of the investable market cap of 1,051 small, medium, and large cap China A-shares to the FTSE Emerging All Cap Index. This is the first international index to cover different sized companies into its inclusion, per the London-based company's statement.

Following the September 2018 reclassification of A-shares to Secondary Emerging market status, FTSE Russell implemented the first phase across four separate tranches beginning June 2019.

Today's successful completion of the first phase of China A-shares inclusion into our global equity benchmarks is a landmark in the development of China's capital markets, enhancing access...

QUESTION FROM HENRY: IS THERE AN EXPECTATION FOR AN EVEN GREATER FLOW OF STOCKS AROUND THIS YEAR’S RUSSELL RECONSTITUTION COMPARED TO PREVIOUS YEARS? THANKS FOR THIS SHOW AND FOR TAKING THE TIME TO TALK ABOUT SMALL CAP VOLATILITY. NO ONE ELSE SEEMS TO DISCUSS THIS STUFF. KEEP IT UP.  QUESTION FROM MBD1101: YOU TALK ABOUT THE RUSSELL RECON COMING UP A LOT. HOW SHOULD THAT IMPACT MY TRADING? IS THERE ANYTHING THAT I SHOULD DO BECAUSE OF IT?  QUESTION FROM LILTO: IS OIV EVER GOING TO COME BACK? I MISS IT.  QUESTION FROM EDWARD THE TRADER: HOW CLOSE ARE RVX OPTIONS TO BECOMING TRADABLE AGAIN? THX FOR ALL YOUR SHOWS. QUESTION FROM MELIN: WHAT ARE YOUR THOUGHTS ON CROSS CORRELATION ACROSS THE MAJOR INDICES AND COMMODITIES? THANK YOU!