Energy sector powers this year’s Russell index reconstitution

Investors’ eyes will turn to the Russell 3000 index in the coming days, as the addition and subtraction of new companies becomes final at the close of U.S. equities markets on Friday.

Catherine Yoshimoto, director of product management with FTSE Russell in Seattle, said 293 securities will be added and 299 deleted as part of the Russell 3000’s reconstitution — which captures public companies’ size and style shifts over the past year.

The main story behind this year’s shifts “is largely about inflation fears,” Yoshimoto wrote in a blog post last month.

Inflation has affected the performance of the Russell 3000 index as well, she added. For the year-to-date period ended May 6, the index was down by 14.2%; the index has continued to fall, returning -21.6% for the year-to-date period ended June 21. (May 6 is when FTSE Russell ranked securities for the reconstitution.)

The total market capitalization of the index fell by 5.9% over the full year ended May 6, to $44.9 trillion.

However, the energy sector “was the past year’s standout performer,” Yoshimoto said in an interview. “Some of those companies in the energy industry saw market appreciation — their prices increased, so their market cap[s] and size[s] increased.”

Energy is the sector with the largest number of companies — six — moving up from the Russell 2000 (U.S. small cap) to the Russell 1000 (U.S. large cap), she added. Those six firms are Antero Resources Corp., Chesapeake Energy Corp., PDC Energy Inc., Ovintiv Inc., Range Resources Corp. and Southwestern Energy Co.

In total, 45 companies will be added to the Russell 1000 index, 21 of which are moving up from the Russell 2000.

Another six IPOs are being added to the Russell 2000 index, four of which are in the health care sector. An additional 76 companies are graduating from the Russell Microcap Index, 25 of which are in the financials sector. Eleven are in consumer discretionary and 10 are in energy.

The market capitalization breakpoint — which separates companies in the Russell 1000 index from companies in the Russell 2000 — declined by 11.5% to $4.6 billion year over year. This occurred “following a volatile year in U.S. equity markets, where small-cap stocks underperformed large-cap stocks,” FTSE Russell said in a June 3 release.

Reflecting the volatility in the tech markets, the ranking of the five largest companies in the index shifted. With a market cap of $1.52 trillion as of May 6, Alphabet Inc. surpassed Amazon.com Inc. ($1.17 trillion) as the third largest company.

And Tesla Inc., with a market cap of $896.8 billion, surpassed Meta Platforms Inc. ($551.5 billion) as the fifth largest company on the indexes. Apple Inc. remains the index’s largest company.

Value stocks outperformed growth stocks across the respective Russell indexes. For the year ended May 31, the Russell 2000 Value index returned -7.7%, but the Russell 2000 Growth index returned -25.7%. Among large caps, the disparity was less pronounced: the Russell 1000 Value index returned 0.9%, while the Russell 1000 Growth index registered -6.3%.