COVID-19 Impacts Cap-Weighted Index Fund Construction

FTSE Russell has published its annual list of pending updates to the Russell 3000 index, the market capitalization weighted equity index that seeks to track 3,000 of the largest U.S.-traded stocks.

The 32nd annual Russell U.S. indexes reconstitution will technically occur after the U.S. equity markets close on June 26. There are currently 143 projected additions and 205 projected deletions for the Russell U.S. 3000. After factoring in the economic impact of the coronavirus pandemic, total U.S. equity market capitalization is down 1%, yet the market cap of 10 largest U.S. stocks is up more than 23%.

“While overall capitalization for the U.S. equity market stayed relatively flat this year, our 2020 annual Russell U.S. indexes reconstitution tells an interesting story about divergence between the largest and smallest U.S. stocks,” says Catherine Yoshimoto, FTSE Russell director of product management.

As Yoshimoto points out, the closely watched market capitalization breakpoint, which separates companies in the U.S. large-cap Russell 1000 Index and companies in the U.S. small-cap Russell 2000 Index, decreased by more than 16% this year, to $3 billion. Notably, the smallest company in the Russell 2000 at this year’s reconstitution—Limestone Bancorp—now stands at $94.8 million market cap, a nearly 38% decline from 2019 and the first time since 2009 that the smallest stock is less than $100 million.

On the other end of the spectrum, the five largest technology-dominated companies have held on to the top five spots, with three topping $1 trillion in market capitalization. Microsoft has retained its spot as the largest company in the Russell 3000 Index for the second year, with a 43.8% increase in total market cap. Apple is now second after a 48.2% rise in the past year, switching spots with third-ranked Amazon, which increased 27.6%. Alphabet and Facebook round out the five largest companies.

As FTSE Russell points out, other technology additions to the Russell 3000 this year include Zoom Video Communications, which is joining the Russell Top 200 Index due to its size, and Pinterest and Mimecast, highlighting the importance of communications technology in the midst of the coronavirus pandemic.

Overall, the large end of the U.S. equity market grew significantly in the past year, with the total combined market cap of the 10 largest companies increasing by 23.3% since the 2019 reconstitution. The pending reconstitution also shows that growth-oriented stocks outperformed value-oriented stocks across all major cap tiers, continuing a trend from last year.

Exemplifying a related trend identified in previous PLANADVISER reporting, only six companies that have gone through recent initial public offerings (IPOs) will enter the Russell 2000 at reconstitution, and they are all health care companies. Simply put, an ever-greater proportion of the wealth being generated by the U.S. and global economies is locked away in private equity markets, which, by design, are accessible only by the wealthy. Recent regulatory developments may help to shift this picture, however.