Wall Street Week Ahead: Index reshuffle to give healthcare stocks a bigger profile
The U.S. healthcare sector looks set for a bulked up profile in growth indexes when FTSE Russell recon- stitutes its stock indexes late next Friday, an annual event that historically creates one of the biggest trading vol- ume days of the year.
The Russell rebalance becomes final on the fourth Fri- day every June, after markets close. Stocks are added or deleted from Russell’s family of indexes, including the Rus- sell 1000 large cap and Russell 2000 small cap, prompting fund managers to adjust portfolios to reflect new weight- ings and components.
Russell bases the placesment in the indexes on a num- ber of factors, including market capitalization, voting rights requirements and country of domicile.
Telegraphing the reconstitution can create additional buying and selling stocks. Some investors may use the ad- ditional liquidity to take advantage of any resulting price dislocations, or to adjust the holdings in their portfolios, especially in smaller companies that have much lower li- quidity.
The resulting surge in trading volume crests right be- fore the market close. FTSE Russell says more than $15 tril- lion is currently benchmarked to its indexes globally and about $9 trillion to its U.S. indexes.
“I’m already at the spot where I will be happy when Russell is behind us because it is an emotionally elevated day, everybody has to really be on their toes, there is a lot of messages and a lot of traffic coming down,” said Gordon Charlop, a managing director at Rosenblatt Securities in New York.
The New York Stock Exchange and Nasdaq, because of the scale of the revamp, reinforces the rules for trades on the close and contingency plans in the event of unusual market conditions. During the June 2019 reconstitution, Nasdaq said 1.279 billion shares representing $42.59 bil- lion were executed in its “closing cross” in 1.14 seconds across Nasdaq listed stocks.
This year’s reconstitution is also influenced by market volatility generated by the COVID-19 pandemic. While other index providers delayed rebalancing that was sched- uled for earlier in the year, FTSE Russell has moved forward with the reconstitution as originally scheduled.
“Our policy team did consult the market on whether any temporary measures were needed to accommodate the market volatility and the overwhelming feedback was that it wasn’t required and we should proceed according to the published rules,” said Catherine Yoshimoto, director, prod- uct management at FTSE Russell.