Get Ready for one of the Busiest Trading Days of the Year

The Russell Indexes are rebalancing.

BlackRock Inc. Ahead of Earnings

BlackRock and other index fund providers will have to adjust their portfolios

Photographer: Scott Eells/Bloomberg

It's that time of year again.

The Russell indexes are about to go through their annual rebalancing, leading to what Convergex, the global brokerage firm that's based in New York, says will "almost certainly be the busiest trading day of the year."

What's more, as much as half of today's trading volume may come in the last five minutes of the session. 

Russell's large-cap index includes 1,000 corporate names while the small-cap index has 2,000. Together they cover more than 90 percent of "reasonably investable" U.S. stocks, according to Convergex. The Russell index not an exclusive 'club' to be sure, but it's still a club and each year companies must apply to be included -- or remain in -- the indexes.

If a company fails to meet certain requirements (for instance, market value) then it is summarily dismissed from the index. This might not sound like a big deal on the surface, but getting the boot can have major consequences.

Here's an explanation from the note, written by Nicholas Colas, chief market strategist at Convergex.

The stakes are higher than just bragging rights at the office, for there is over $4 trillion of capital benchmarked to the Russell indices. Being “In” means a larger base of passive investors to own your stock and also active managers who have to consider buying shares. Being kicked out means losing almost all those owners, and largely in one day. That day is today. And that’s why the folks at Russell publish the final lists a week before the actual rebalance day – to give markets a week to adjust prices for securities that are either being added or deleted from the indices, or moving from the Russell 1000 to 2000 or vice versa.

To give you a sense of the money involved here, Russell Indexes writes on its website that: "Russell now captures 73 percent of the market share for all U.S. institutional equity products reporting a benchmark. With $5.2 trillion in assets benchmarked, more U.S. institutional funds track our indexes than all other U.S. equity indexes combined."

Convergex points out that traders and investors have been preparing for potential moves in and out of the Russell indexes for more than a month. In fact, the brokerage analyzed how the stocks that are making moves in and out of the indexes have performed since the start of May.

Here’s what they found:

The 120+ names being added to the Russell 2000 are up an average of 11% since May 1st...And the final move – today – could take this select list higher still.

Anomaly – the 50 companies moving from the 1000 to the 2000 are down 3.2% since May 1st...the common perception is that moving “Down” to the 2000 means actually picking “up” more potential capital.

And how about those companies that are getting the heave-ho entirely? Yep – not good news there. The average return for the 150+ companies leaving the Russell 2000 is -1.9% from May 1st to today.

Happy trading.

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