Friday’s Russell rebalancing could increase volatility in a nervous stock market

A screen displays stock market information on the trading floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, US, May 18, 2022. REUTERS/Andrew Kelly

Register now to get free unlimited access to Reuters.com

NEW YORK (Reuters) – Investors in the volatile US stock market brace for what could be one of the heaviest trading days of the year on Friday, as FTSE Russell completes a rebalancing of indexes that tracks trillions of dollars in investor money.

FTSE Contact refreshComponents of its indexes once a year in late June to better reflect the broader markets. This motivates fund managers who have benchmarked their performance to bring their own portfolios in line with the changes. About $12 trillion was measured by US Russell Indexes.

The resulting buying and selling tends to peak at the close of the trading session before the reconfiguration becomes final, and some investors seek to trade when any price disruptions may result. Total trading volume on the day of the 2021 reconstitution exceeded 16 billion shares, making it among the busiest sessions of the past year.

Register now to get free unlimited access to Reuters.com

While previous rebalancing has usually taken off without a hitch, some investors said the event is likely to exacerbate volatility this year, after fears of a more hawkish Federal Reserve have led to criticism of stocks and bonds and increased market volatility in recent weeks. Read more

The benchmark S&P 500 is down more than 21% year-to-date as the Federal Reserve tightens monetary policy to tame spiraling inflation.

“The Fed is raising rates, we are seeing liquidity drying up, and while there is ample liquidity in the stock market, certainly with negative sentiment, this rebalancing story will be much more difficult,” said Rob Haworth, chief executive officer. An investment strategist at US Bank Wealth Management in Seattle.

One of the biggest changes this year will be the Meta Platforms (META.O)formerly known as Facebook, moved to the Russell 1000 . Value Index (.RLV)Typically the domain of companies that are seen as trading at a discount to their fundamentals. At the same time, energy stocks will gain more weight in the Russell 1000 . growth index (.RLG)after a violent rally over the past year.

Meta’s move into the Russell 1000 Value Index comes after a more than 50% drop in the social media giant’s shares this year due to warnings of faltering revenue after a decade of explosive growth. Read more

The change will cause the telecom services sector’s weighting in the Russell 1000 growth index to drop to 8% from 9.9%, with the sector’s weighting in the Russell 1000 growth index strengthening to 8.7% from 6.9%, Jefferies said.

Meanwhile, the stellar performance of the energy sector will lead to a greater weighting of energy stocks in Russell’s growth indices (.RLG)(.RUO)Jeffreys said.

The energy sector, which is up nearly 40% since remodeling last year thanks to a sharp rise in crude oil prices, will see its weight gain to 1.7% in the Russell 1000 growth index, from 0.6%.

This move is more pronounced in the Russell MidCap Growth Index (.RMCCG) With a weight of 5.1% for energy, up from 3.3%.

“Growth managers who haven’t had to care about energy for several years should now pay attention to the sector,” said Steve Desanctis, equity analyst at Jefferies in New York.

Given the volume of trading and the number of shares involved, FTSE Russell is taking steps to be transparent about the listing rules. This begins in May on “ranking day,” which defines the market capitalization ranges a stock must be within for inclusion. Subsequent steps include initial lists of additions and deletions from indexes.

“We don’t want to make unnecessary changes, any changes in methodology are considered,” said Catherine Yoshimoto, director of product management for US Russell Indices at FTSE Russell. “We are looking at where there might be future improvements but the goal is definitely to keep it stable.

Register now to get free unlimited access to Reuters.com

(Reporting by Chuck Mikolajchak) Editing by Cynthia Osterman

Our criteria: Thomson Reuters Trust Principles.

.