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Financials Surpass Technology Companies in Russell Rebalancing

Financial companies will displace computer and software makers as the largest industry in the Russell 3000 after the addition of Berkshire Hathaway Inc. when the index rebalances this month.

The insurance and investment company run by billionaire Warren Buffett is set to be added to the Russell 3000 and Russell 1000, according to the Tacoma, Washington-based Russell Investments’ website. Berkshire is one of 38 financial companies on the preliminary list. Russell will review and update the additions June 18 and again on June 25 before they take effect.

Banks and financial firms will account for 19 percent of the index, up from 15.3 percent last year, making it the biggest increase by industry based on market value. Berkshire will also account for about 1.1 percent of the rebalanced Russell 1000 and will rank in its top 20 companies, according to New York-based Investment Technology Group Inc., which monitors and analyzes changes in indexes for its institutional clients.

“It reflects the recapitalization of the financial sector, as many of the companies in that sector over the last two years either failed, merged or declined,” said Eric Teal, who oversees about $4.5 billion as chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina. “As the sector has stabilized, benchmarks are adding new constituents. It’s a theme with financials, there are similar moves occurring in the S&P benchmarks.”

Technology vs. Financial

Russell plans to add 47 technology stocks, increasing the sector’s market value to $2.23 trillion and accounting for 16.7 percent of the index. While nine fewer financial companies will be added, the industry will see a 57 percent gain in value to $2.54 trillion. That will give the sector the largest chunk of the index at 19 percent.

Berkshire Hathaway’s Class B shares became more affordable after the company’s 50-for-1 stock split in January. The Class B shares now trade at $74.92, compared to the $3,340 before the split. Berkshire Hathaway, the fifth-largest U.S. company with a market value of $185.9 billion, replaced Burlington Northern Santa Fe Corp. in the Standard & Poor’s 500 Index on Feb. 12.

The Russell 3000 represents the 3,000 largest U.S.-based companies, while the Russell 1000 is made up of the largest third of those companies. The indexes are reconstituted each year by ranking U.S. stocks by equity value as of May 28.

26 Percent Growth

There are 262 preliminary stocks designated for addition to the Russell 3000, with 47 technology firms accounting for the most by sector, according to the number of companies. The total market capitalization is set to grow 26 percent to $13.4 trillion. Energy companies account for the only sector that will see a decline in market capitalization this year, falling 0.8 percent to $1.26 trillion. Exxon Mobil Corp. remains the largest company by market value.

Companies that are added to the index tend to outperform those taken out on the day of the rebalancing, according to ITG. Last year, additions beat deletions by almost 22 percent on the day the changes went into place. That may help bring speculators back to the market this year as they hope for another wide spread, said ITG.

The Russell 3000 Index has fallen 1.2 percent, while the Russell 1000 has fallen 1.7 percent in 2010, compared with the 2.3 percent drop by the S&P 500. The Russell 2000 has rallied 4.3 percent.

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