The Story Behind 2024 Russell Recon Style Shifts

seekingalpha06-19

Alphabet, Meta, and the "Magnificent Seven" maintain their 100% growth status, significantly increasing the Technology sector's weight in the Russell 1000 Growth Index to 59.7%.The Health Care, ...

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Industrials show a notable style shift between the Growth and Value Indexes.AmnajKhetsamtip/iStock via Getty Images Every year in June, we recalibrate the Russell US Indexes from the ground up to ensure continuing, accurate representation of the ever-changing equity market and its segments. Of the many themes that emerge from our annual Russell Reconstitution, investors are often most interested in constituent shifts between our growth and value indexes. On May 24, we released preliminary index additions and deletions in advance of this year's recon day as well as a summary of this year's changes, giving market participants a preview of Russell US Style Index changes. Here we take a brief look at how Russell recon works and highlight several noteworthy style stories, including interesting dynamics in the Technology industry. Assigning style weights with an objective methodology Each year, our Russell recon process involves reevaluating companies in our Russell US Indexes to determine where they lie along the investment styles spectrum. We calculate Russell 1000® and Russell 2000® Growth and Value Index constituent weights and apply banding to limit turnover during the reconstitution. Constructing the Russell 1000 Growth and Value Indexes As shown, we use three main variables in our methodology - one value and two growth metrics - to calculate a composite value score (CVS) for each Russell 1000 Index constituent. We then rank the stocks and apply a probability algorithm to determine style index membership weights, where half of the market value of the Russell 1000 Index is allocated to growth, and the other half to value. If constituent data is missing or the book-to-price value is negative, we substitute the company's score with the average for its Industry Classification Benchmark (ICB) group.  Russell Style methodology variable  Growth Value   IBES 2-year forecast medium-term growth Book-to-Price (BP)   Historical 5-year sales per share growth     Click to enlarge It's also important to note that some stock characteristics don't allow for absolute style distinction, and in these cases, - which typically represent about 30% of the index market value - we allocate portions of the company's market cap to both growth and value. Since the Russell 1000 Index is the sum of the Russell 1000 Value and Russell 1000 Growth indexes - and the same is true for the Russell 2000 and its style indexes - constituent market cap is never double counted. \"Magnificent Seven\" stocks stay pure growth During last year's recon, tech giants Alphabet (GOOG, GOOGL) and Meta (META, META:CA) made headlines when both companies shifted back from partial value to pure growth. Based on this year's preliminary list of recon changes for our large cap style indexes, Alphabet and Meta would each remain 100% growth, along with the other companies which make up the group known as the \"Magnificent Seven\" (Microsoft (MSFT, MSFT:CA), Apple (AAPL, AAPL:CA), Nvidia (NVDA, NVDA:CA), Amazon.com (AMZN, AMZN:CA, Tesla (TSLA, TSLA:CA)). Technology industry widens its lead in large cap growth With the mega-cap Magnificent Seven delivering strong performance, Technology would remain the largest industry in the Russell 1000 Growth Index - and is poised to add to its weight. As shown, the Technology industry's weight would climb more than six percentage points to reach 59.7%, the largest increase in weight for any industry in the index. Potential Industry Style Shift For Large Caps Source: FTSE Russell. Based on preliminary 2024 Russell Reconstitution additions and deletions. Please see the disclaimers for important legal disclosures. The Health Care, Consumer Discretionary, and Industrials industries would exhibit the most significant style shifts from growth to value, increasing their weights in the Russell 1000 Value Index, while their weights in the Russell 1000 Growth Index would decline. Small cap sees Technology shrink and Industrials change its style While preliminary changes to the Russell 1000 Growth Index indicate the Technology industry would see a notable weight increase, the small-cap growth counterpart would see an opposite effect, with the Technology industry expected to decline 4.1 percentage points to 17.9% in the Russell 2000 Growth Index. Potential Industry Style Shift For Small Caps Source: FTSE Russell. Based on preliminary 2024 Russell Reconstitution additions and deletions. Please see the disclaimers for important legal disclosures. A closer look at potential constituent membership changes sheds light on the Technology companies driving this dynamic. Super Micro Computer (SMCI), for example, would count as the largest deletion by weight from the Russell 2000 Growth Index - and it would be the largest addition by weight to the Russell 1000 Growth Index. MicroStrategy (MSTR) would be another example of a tech firm departing the Russell 2000 Growth Index, destined in part for the Russell 1000 Growth Index.  Largest Russell 2000 Growth Index deletions by weight as of 4/30/24  Security Weight Destination   Super Micro Computer, Inc. 3.56% Russell 1000 Growth Index   MicroStrategy Incorporated 1.29%  Russell 1000 Growth Index Russell 1000 Growth Index    Comfort Systems USA, Inc. (FIX) 0.89% Russell 1000 Growth Index   Weatherford International PLC (WFRD) 0.72% Russell 1000 Growth Index   e.l.f. Beauty, Inc. (ELF) 0.71% Russell 1000 Growth Index   Click to enlarge Source: FTSE Russell. Based on preliminary 2024 Russell Reconstitution additions and deletions. Please see the disclaimers for important legal disclosures. Click to enlarge In the Russell 2000 Value Index, Utilities would see the highest industry weight increase, growing 1.3 percentage points to 5.3%. Financials would remain the largest industry, with a small uptick in weight from 24.6% to 25.1%. The Industrials industry would experience a noteworthy style shift, with a decrease in weight in the Russell 2000 Value Index and an increase in the Russell 2000 Growth Index. An evolving reflection of style Every year, professional money managers, brokerage houses, and other market participants closely track the constituent style classification shifts that result from our Russell recon. As we commemorate 40 years of the Russell US Indexes, the recon serves as an appropriate reminder that companies, industries, and equity markets are continually changing - and we design our methodology to ensure our style indexes continue to reflect the evolution. Disclaimer © 2024 London Stock Exchange Group plc and its applicable group undertakings (\"LSEG\"). LSEG includes (1) FTSE International Limited (\"FTSE\"), (2) Frank Russell Company (\"Russell\"), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, \"FTSE Canada\"), (4) FTSE Fixed Income Europe Limited (\"FTSE FI Europe\"), (5) FTSE Fixed Income LLC (\"FTSE FI\"), (6) FTSE (Beijing) Consulting Limited (\"WOFE\") (7) Refinitiv Benchmark Services (UK) Limited (\"RBSL\"), (8) Refinitiv Limited (\"RL\") and (9) Beyond Ratings S.A.S. (\"BR\"). All rights reserved. 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