Every June, Russell re-evaluates the index composition of its indexes.
Why? Over 30 ETFs and many more mutual funds with more than $500 million in assets are tied to the various Russell indexes, and the rebalancing leads to heavy trading, volatility and even speculation. This will have an impact on many stocks, mutual funds and ETFs. And it catches the attention of hedge funds managers, analysts and speculators.
Benchmarks will change, and fund managers will be busy to adjust their holdings in order to continuously track the "new" benchmark closely. Numerous analysts' reports are popping up with educated guesses on which companies will be dropped, included and thereby rise and fall.
Unlike other indexes, the Russell methodology is quite transparent. Russell picks the largest companies (which represent 99 percent of the U.S. equity market) for its master list. The 1000 biggest companies constitute the Russell 1000 Index, the next 2000 biggest companies constitute the Russell 2000 Index. and both indexes combined create the Russell 3000 index.
The three main ETFs linked to Russell indexes are the iShares Russell 1000 (IWB), the iShares Russell 2000 (IWM) and the iShares Russell 3000 (IWV).
Because so many stocks fell sharply, the new cut-off point for equities to be included in the index will drop. With more than 200 names being added, the stocks in play will see some volatility in the next few weeks before the new lists are announced.
The index methodology for the S&P 500 and Dow Jones on the other hand are quite different. The S&P 500 is maintained by the S&P Index Committee, which is a team of Standard & Poor's economists and analysts. The Index Committee meets on a regular basis to review all S&P index constituents. The goal of the Committee is to ensure that the S&P 500 reflects the risk and return characteristics of a universe of large cap US companies.
The Dow Jones Index constituents are selected by the editors of The Wall Street Journal. A stock typically is added only if the company is widely known, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents a market sector covered by the average. Composition changes are rare and generally occur following corporate acquisitions or other dramatic shifts in a component company's core business.