U.S. Large Caps Flex Muscle in Russell Index Rebalancing

Global market capitalization showed a notable decline, sliding to $44.2 trillion on May 31, from $52.2 trillion the same period a year ago, while U.S. large-cap stocks, led by the tech sector, had a strong performance in the Russell 3000, slipping to $15.8 trillion from $16.7 trillion during this same period.

“The strong performance of the global markets in the first quarter of 2012, led by large-cap stocks in the U.S., showed in the all-time high of the Russell 1000 Index on April 2,” said Stephen Wood, chief market strategist for North America at Russell Investments. “However, international turmoil over the last few months has contributed to a decline in the global equity market and a resulting drop in market capitalization of the Russell global index family, as shown during the annual rebalancing process.”

ExxonMobil dropped from first to second position among U.S. stocks in the Russell 1000 Index at reconstitution, exhibiting a significant shift from growth to value. Overall, the Russell U.S. indexes reflect a market shift over the past year to higher returns in growth stocks. Apple Inc. took position as the largest stock in the Russell 1000 ($540.2 billion), with a 68% capitalization increase since May 31, 2011.

At 17.1%, technology became the largest sector in the Russell 1000 Index at rebalance, overtaking financial services at 16.7%.  This was in part because of the inclusion of Facebook—the largest addition to the Russell indexes globally—to the technology sector of the Russell 1000 Index.

Tech also led U.S. small caps in the biggest increase year-over-year, as 37 technology companies joined the Russell 2000 Index. Financial services continues to be the largest sector in this index, even though 17 financial services stocks graduated to the U.S. large-cap Russell 1000.

Malaysia, China and Hong Kong showed the largest percentage increase in country weight within the Russell Global Index since last year’s reconstitution. China remains the world’s third-largest country in total market capitalization, behind the U.S. and Japan. And emerging markets declined materially against developed markets over the past year, decreasing their Russell Global Index weighting, from 14.7%, to 13.7%.

Since last year’s rebalance, there has been a notable decrease in equity correlations across global markets, as demonstrated by the Russell global index family. After the 2011 reconstitution, the rolling monthly trading correlation between the U.S. large-cap Russell 1000 Index and the Russell Developed Europe Index was at a high of 0.92, which dropped to 0.66 as of May 31, 2012.  The shift in correlation between the Russell Developed Europe Index and the Russell Asia-Pacific Index has been even more dramatic, falling from 0.55 just after last year’s reconstitution to as low as -0.18 in recent weeks.

Russell’s index reconstitution process this year was marked by a relatively low turnover rate in underlying constituents, which Russell Indexes attributes to ongoing fine-tuning of the reconstitution methodology.

And to complete this year’s reconstitution, the “Closing Cross,” NASDAQ’s trading mechanism that simultaneously brings together the buy and sell interests for investors in specific NASDAQ, NYSE and NYSE Amex stocks to execute all shares for each stock at a single price, was successfully executed on the NASDAQ exchange on Friday afternoon just before the U.S. market close. According to NASDAQ, in 1.15 seconds, the NASDAQ Closing Cross executed approximately 687.9 million shares representing $9.5 billion across 2,195 NASDAQ-listed stocks.

“Throughout its nearly 30-year history of index construction, Russell has drawn on its unique insight into global capital markets and multi-asset portfolio construction and implementation to design benchmarks offering exposure to the true performance of different segments and asset classes of the market,” said Rolf Agather, global head of index research and innovation at Russell. “The annual reconstitution helps ensure that our indexes truly reflect the current state of the global markets.”

Final membership lists for the Russell Global, Russell 3000, Russell 1000, Russell 2000, Russell Midcap and Russell Microcap Indexes, accounting for approximately $3.9 trillion in assets benchmarked, were confirmed after Friday’s market close. 

Final lists of additions and deletions are available on the Russell reconstitution website.