While index-based ETFs are known to be passive compared to active ETFs, changes indeed occur. At the end of this week, a large-cap growth ETF with approximately $100 billion in assets will be adding and removing companies. Meanwhile, its $60 billion small-cap cousin will be changing more than 10% of its constituent universe.
Why Does the Rebalance Matter?
The annual FTSE Russell U.S. reconstitution takes place after the market closes on June 28 in a well-planned manner. While the S&P 500 adds and removes one or two stocks on a seemingly ad hoc basis with a few days of notice, FTSE Russell communicated preliminary changes on May 24. The large-cap Russel 1000 index and the small-cap Russel 2000 index added to and removed several dozen companies, as well as their growth and value styles slices.
Such moves help keep the indexes current and reflective of market developments. Friday should be a big trading close for the stock market as index funds work to ensure low tracking error. According to Nasdaq, closing market trading volume heading into the Russell reconstitution in 2023 was more than eight times the average last year.
If you own a related Russell index ETF and do not plan to trade, it will be important to look inside next week and make sure you still are getting the exposure you hoped for.
Below are some highlights based on the preliminary information:
New Large-Caps Emerge
The iShares Russell 1000 ETF (IWB) is slated to have 38 new companies. Examples of companies graduating into IWB from the small-cap index include Carvana, MicroStrategy, and Super Micro Computer. Meanwhile, Astera Labs and Loar Holdings are expected to join following recent initial public offerings. Super Micro Computer is the only one of the five already part of the S&P 500 Index.
Many people think broad-market core index ETFs are the same. However, the SPDR S&P 500 ETF (SPY) outperformed IWB year to date through June 18 by 120 basis points.
In contrast, 30 former Russell 1000 companies will likely be falling into small-cap index behind the iShares Russell 2000 ETF (IWM). They should be joined by 213 companies including IPOs from Boundless Bio and Solarmax Technology. Others to join include Carpenter Technology and Vertex.
What’s Heading Into Growth and Value ETFs?
The iShares Russell 1000 Growth ETF (IWF) manages $98 billion in assets. Following the reconstitution, IWF will have larger exposure to information technology and smaller exposure to consumer discretionary and industrials. IWF is expected to own Coinbase Global, Dell Technologies, Goldman Sachs, and Super Micro Computer. None of these companies is part of the S&P 500 Growth index.
The iShares S&P 500 Growth ETF (IVW) has outperformed IWF by 300 basis points thus far in 2024. See related: BlackRock Favoring Growth Heading into Second Half
The iShares Russell 1000 Value ETF (IWD) manages $55 billion in assets. While financials should remain the largest of the sectors for IWD, stakes in consumer discretionary and industry will likely be higher. It will add Accenture, Home Depot, Lockheed Martin, and Target. Three of the four are currently part of the CRSP US Large Cap Value Index.
The Vanguard Value ETF (VTV) has outperformed IWD by 250 basis points to start the year.
The Goldman Sachs MarketBeta Russell 1000 Value ETF (GVUS) and the Vanguard Russell 1000 Growth ETF (VONG) are other ETFs that track Russell large-cap style indexes.
Smart Beta ETFs Affected Too
In addition to the expected changes for these market-cap-weighted ETFs, some fundamentally focused ETFs will likely be impacted.
The Xtrackers Russell US Multifactor ETF (DEUS) uses the Russell 1000 as its starting universe. From here, the fund incorporates low volatility, momentum, quality, size, and value criteria on a semiannual basis. However, the annual adjustments to the Russell 1000 index will play a role.
Meanwhile, the ProShares Russell 2000 Dividend Growth ETF (SMDV) owns small-cap companies that have raised their dividends for 10 consecutive years. Financials, industrials, and utilities were the recently heftiest sectors, but that could change as the broader index is reconstituted.
ETFs are not static. It pays to be educated about the changes happening with your or your client’s investments.
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