As two popular Russell index-based exchange traded funds go through their annual rebalancing and reconstitution act, investors will find their exposure has shifted in response to the post-election U.S. equity market rally.
The large-cap Russell 1000 Index, which acts as the underlying benchmark for the iShares Russell 1000 ETF (NYSEArca: IWB), returned 21.7% and the small-cap Russell 2000 Index, which acts as the benchmark for the iShares Russell 2000 ETF (NYSEArca: IWM), increased 27.6% over the past year, with the lion’s share of the gains – +15.1% and 19.7%, respectively, having come in the post-election period.
“It was a tale of two markets this year in US equities as reflected by the Russell US Indexes,” Mat Lystra, Senior Index Research Analyst, FTSE Russell, said in a research note. “The market exhibited strong growth in the past year, yet the majority of this growth has come from the ‘Trump Bump’ following the US presidential election.”
Lystra explained that among the top performers included the so-called “tech high five” or large technology companies, like Amazon (NasdaqGS: AMZN), which led the recent charge.
This is among the reasons “why we reconstitute at all,” Lystra told ETF Trends in a call. “We re-evaluated the entire market and made sure it was true to changes currently taking place.”
The indices now include larger tilts toward technology, which makes sense given how we are living today. Lystra argued that the indices reflect how more people are utilizing the services and products of these tech companies, like Google search and Amazon’s Prime shipping.
“It reflects how the economy has transitioned to something tech focused,” Lystra said.
IWB’s largest sector component is information technology at 21.6% of the underlying portfolio, with Apple (NasdaqGS: AAPL), Microsoft (NasdaqGS: MSFT) and Amazon among its top three holdings. IWM also includes a hefty 17.9% tilt toward information technology names, including Advanced Micro Devices and Take Two Interactive Software among its top components.
“It looks like we could be in for another style shift, as value stocks have recently made a comeback compared to growth stocks,” Steven DeSanctis, SMID Cap Strategist, Jefferies & Co., said in a note. “However, [small cap] growth stocks still tend to trade at lower price-to-earnings multiples [relative to their historical average] than [small cap] value stocks while [tending to deliver higher] relative earnings growth than their value counterparts. With that said, buckle up because the ride could be bumpy.”
Overall, FTSE Russell Indexes’ rebalancing act went on without a hitch, especially compared to last year when we were experiencing a number of volatile events that caused markets to rapidly shift.
For more information on index ETFs, visit our indexing category.