SOURCE: Russell Investments

Russell Investments

May 23, 2012 12:13 ET

Decreasing the Russell Index Turnover Cost

Methodology Enhancements Have Steadily Decreased Price Pressure at Annual Reconstitution

SEATTLE, WA--(Marketwire - May 23, 2012) - Over the past twelve years, Russell Indexes has steadily decreased the turnover percentage, or the number of index additions and deletions, around its annual reconstitution. While the core of its objective and transparent methodology has not changed since the indexes' inception in 1984, a number of new measures have been introduced to alleviate price pressure around the annual rebalancing.

In particular, three adjustments to the Russell Indexes methodology in recent years have helped to significantly decrease turnover at reconstitution, ensuring that each index remains an accurate reflection of an individual market cap tier.

  • Quarterly IPO Additions - IPOs are now added to the Russell Indexes once every quarter rather than just at reconstitution, and a company that is eligible is added after a minimum of one month seasoning.

  • Provisional and Legacy Indexes - Passive fund managers may now make their portfolio transitions on any day over a two month period, one month prior or one month following the annual reconstitution, based on performance figures provided by Russell.

  • Capitalization Banding - Implementation of a +/-2.5% membership band around market capitalization breakpoints now reduces the number of securities moving between small and large-cap segments at reconstitution, without distorting cap tier performance.

The Russell Indexes methodology around reconstitution has helped to spread any potential arbitrage, or opportunistic trading, over a longer period of time than just at reconstitution, making the transparency of index changes through Russell's rules-based mechanism desirable for passive indexers. Academics have actually argued that Russell Index's transparent and predictable approach to annual rebalancing helps to lessen the potential impact of arbitragers and reduce short-term volatility as index changes can be anticipated days or months earlier.1

Russell has seen the turnover rates of the Russell Indexes around reconstitution decrease in recent years2. The indexes remain market efficient, able to be tracked and duplicated readily to act as a performance standard for active managers and a replicable vehicle for passive investing strategies. The Russell Family of Indexes currently captures 68.2% of U.S. institutional market share, more than any other index family.

The annual Russell Indexes reconstitution final list will be posted to the Russell Reconstitution website on June 25, 2012. For a more information on the Russell family of global indexes, go to the Russell Indexes website.

About Russell Investments

Russell Investments (Russell) is a global asset manager and one of only a few firms that offer actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital markets insights, manager research, Indexes, portfolio implementation and portfolio construction.

Russell has about $155 billion in assets under management (as of 3/31/2012) and works with 2,400 institutional clients, more than 580 independent distribution partners and advisors, and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.5 trillion in 2011 through its implementation services business. Russell calculates more than 80,000 benchmarks daily covering 98% of the investable market globally, 85 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indexes.

Russell is headquartered in Seattle, Washington, USA, Russell has offices around the world including Amsterdam, Auckland, Beijing, Chicago, Dubai, Frankfurt, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow us @Russell_News.

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Russell's indexes are unmanaged and cannot be invested in directly.

  1. Dr. Antti Petajisto, "The index premium and its hidden cost for index funds," NYU Stern School of Business, April 8, 2010
  2. Turnover percentage for the Russell 2000® Index peaked at 33.00% in June 2000, its average over 5 years prior to capitalization banding implementation in June 2007 was 16.40% and its average since banding implementation in June 2007 is 9.05%. The Russell 2000® Growth Index turnover percentage peaked at 46.58% in June 2000, its average over 5 years prior to capitalization banding in June 2007 was 31.50% and its average since the banding implementation in June 2007 is 24.40%