Russell Reshuffle Outcome: Surprise
When Index Inclusion Defies Expectations
Disclaimer: I own shares of some of the mentioned companies and stand to benefit if they rise in price. I may decide to purchase or sell shares at any time without prior notice. Do your own research and size positions appropriately if you invest. Nothing here is meant to be understood as investment or financial advice. I use AI tools to help me in my research, writing, and editing processes.
Introduction
Friday's Russell reconstitution demonstrated once more that the market price action defies my attempts at predicting them. While index funds executed a record $102.455 billion in the closing cross, the price action of the selected stocks that I follow was unexpected. But we learn through surprises (see chapter 6 of “A Brief History of Intelligence” by Max S. Bennett), and it seems there is a lot to learn. This post is a follow-up on my earlier article:
Friday, June 27th
The annual Russell index reconstitution took place, setting a “Record with $102.455 Billion Executed in Closing Cross”. Of the nine companies I mentioned in that post, all but one had (sometimes highly) elevated trading volumes. Interestingly and unexpectedly, of the nine stocks mentioned, all but three stocks were down during the day. I expected buying pressure for those stocks that are included for the first time in the indices.
Russell 3000
inclusion
ACNT 0.00%↑, Volume 7.3x avg, -0.9%
GTX 0.00%↑, Volume 6.8x avg, +2%
IDR 0.00%↑, Volume 5.9x avg, -3.7%
SNWV 0.00%↑, Volume 10.1x avg,-9.4%
exclusion
CDLX 0.00%↑, Volume 4.4x avg,-10.9%
Russell Microcap
inclusion
MIND 0.00%↑, Volume 1.4x avg,-3.3%
RAVE 0.00%↑, Volume 2.6x avg, +1.9%
“SaaS Gem”, Volume 1.3x avg, +5-10%
exclusion
CREX 0.00%↑, Volume 0.8x avg, -4.5%
I also observe:
The trading volumes were less anomalous for the smaller index, i.e. the Russell Microcap. Considering that there are fewer assets within the investment vehicles that track the smaller index (please correct me if my understanding is incorrect), it seems intuitive that fewer shares were traded. I guess that CREX 0.00%↑ had lower-than-average volumes, presumably because it was already negligible in the Microcap index to begin with.
Maybe it was a coincidence, but two of the three Microcap index inclusions were up on the day. This is in stark contrast to the Russell 3000 inclusions: three of four declined.
Monday, June 30th
On Monday, the first day of trading with the new indices:
Russell 3000
inclusion
ACNT 0.00%↑, Volume ~1x avg, +0.1%
GTX 0.00%↑, Volume 0.7x avg, +0.1%
IDR 0.00%↑, Volume 0.8x avg, +1.7%
SNWV 0.00%↑, Volume 1.5x avg, +9.7%
exclusion
CDLX 0.00%↑, Volume 0.7x avg, +3.5%
Russell Microcap
inclusion
MIND 0.00%↑, Volume 0.6x avg, -2%
RAVE 0.00%↑, Volume 2.9x avg, +4.6%
“SaaS Gem”, Volume 0.4x avg, +0%
exclusion
CREX 0.00%↑, Volume 1.2x avg, +5.3%
I observe:
For most stocks, the trading volumes were lower - except for RAVE.
Many stocks moved counter to their Friday share price move, but not all.
Conclusion
This is a very small sample, so any conclusion is anecdotal at best. That said, I capture some thoughts of mine in the hope of eliciting feedback from readers and also to revisit at the next reconstitution event.
As anticipated, the trading volume was elevated on Friday, particularly for the larger index stocks. However, I do not yet have a proper handle on the price drops for Russell 3000 stocks on Friday. Currently, I have two half-baked theories:
This may be due to market-making mechanisms, or
If shareholders bought in anticipation of the reconstitution catalyst (Friday), and then sold into the buying volume.
I am not knowledgeable on point 1, but point 2 would strike me as unlikely because, for the smaller index, my small number of observations ran counter to that. If there were catalyst traders, I would have expected a similar move as with the Russell 3000. Therefore, I suspect it may have something to do with low trading volumes of the smaller stocks and that market makers might run into elevated risks if they have to hedge illiquid stocks for such a day.
Your Turn
Did you track stocks during the Russell Index reconstitution event? What were your observations? Were you surprised by price movements? Do you have thoughts about what to take away or how to explain what happened? Please feel free to share!