2021 Russell Index Reconstitution Results

In the midst of this year’s Russell Reconstitution, we took a look at the importance of the annual event. And now that results[1] of this year’s recon are in, there are some key statistics worth highlighting.

This year’s reconstitution reveals the U.S. equity market increased in size, with the total market cap of the Russell 3000 Index up 51.9% from $31.4 trillion as of last year’s rebalance, to $47.7 trillion based on this year’s rank day (May 7, 2021).

Overall, this year’s recon is characterized by the outperformance of the small cap Russell 2000 Index, driven by both economic stimulus and recovery in the markets as vaccination rates propel economies to open to pre-pandemic levels. Moving forward, the performance of these cyclical, small cap, growth and value stocks may strengthen as the U.S. economy continues to accelerate upward, ultimately providing more opportunities for market participants to manage their exposure.

Russell 1000 Index:

• Representing the U.S. large cap market segment, the total market cap of the Russell 1000 Index increased 49.5% to $44.1 trillion, up from $29.5 trillion as of last year’s reconstitution.
• The largest five companies in the Russell U.S. Indexes have remained unchanged since 2019’s reconstitution, but the order of them has since changed.
• Four companies surpassed the $1 trillion market capitalization mark, up from three last year, with Alphabet joining Apple, Microsoft and Amazon.com.
• Tesla and J.P. Morgan Chase entered the top 10 companies by market capitalization, replacing Proctor & Gamble and Walmart. The top 10 companies had a total market capitalization of $10.9 trillion, up 53% vs. 2020, and representing almost one-quarter of the total market capitalization of the Russell 1000 and 22.9% of the Russell 3000.
• Five IPOs are being added to the Russell 1000 Index at this year’s reconstitution, as 26 other companies are also joining the Russell U.S. Indexes universe.

Russell 2000 Index:

• Representing the U.S. small cap market segment, the total market capitalization of the Russell 2000 Index increased 84.2% to $3.5 trillion, up from $1.9 trillion as of last year’s reconstitution.
• 38 IPOs were added to the Russell 2000, 21 of which are classified in the healthcare industry.
• The largest company in the index (with banding applied) is Performance Food Group, with a total market cap of $7.3 billion, representing a 65.9% increase over last year’s largest company.
• The smallest company in the Russell 2000 (Velocity Financial) has a total market cap of $257.1 million, an increase of 171.2% from $94.8 million in 2020.

Year-to-year changes in the breakpoint between the Russell 1000 and the Russell 2000 (i.e. the market capitalization that demarcates the boundary between large-cap and small-cap sectors) create a useful gauge of secular growth in market valuations. Reflecting a promising 12 months for U.S. small-cap shares and economic recovery, the latest reconstitution saw the breakpoint between large-cap and small-cap stocks increase 73.3% from $3.0 billion in 2020 to $5.2 billion this year.

The surge in IPO activity in the past 12 months has been remarkable. More than 850 companies have gone public in the U.S., raising a record $173 billion, which is its highest level of activity dating back to February 1997. The market cap threshold for inclusion in the Russell 2000 has risen to $257 million, the highest since 2007.

U.S. banks have lagged the post-pandemic market recovery, and as a result, many were dropped from the Russell 2000 this year. In fact, a record number of financial services companies were deleted from the Russell 2000 Index this year.

Away from the limelight given to FAANG and Nasdaq stocks, small-cap shares saw a tremendous run over the last 12 months. And for those investors looking to invest in small-cap stocks available in the U.S. stock market, the go-to index became the Russell 2000.

Comparing June 25, 2021, to the same day in 2020, the price of the Russell 2000 Index increased by 66%.

Like most equity indices, the price of the Russell 2000 initially took a steep dive with the shutdown of the world economy as a result of COVID-19.

Small cap outperformance was a trend that began with a surge in performance in Q4 2020, while closely tracking the vaccine- and stimulus-fueled rise in long-dated U.S. Treasury yields. This macroeconomic backdrop aided the cheaper cyclical stocks that make up a bigger portion of the Russell 2000 small-cap index rather than the pricier tech stocks that dominate the larger Russell 1000 and the Nasdaq.

This rotation into cyclical stocks has slowed since mid-March with the recent stabilization of government bond yields, and release of consensus-beating quarterly earnings favoring a shift back to growth stocks. Nonetheless, the Russell 2000 has surged to a new, higher level in 2021, and when compared to its index counterparts, the performance of the Russell 2000 is unmatched.

The year 2021 saw a rise in both the Russell 1000 and 2000 Value Indexes, much of that driven by the healthcare industry. Specifically, the Russell 1000 Value Index saw an increase in the healthcare industry, whose weight increased from 11.8% in 2020 to 16.2% of the index in 2021. Similarly, the Russell 2000 Value Index also saw an increase in the weight of healthcare-classified stocks, from 5.6% in 2020 to 10.5% this year.