FTSE Russell rebalanced its major indices, including the small-cap Russell 2000, to ensure changes in market value and styles are accounted for, and small-cap exchange traded fund investors should take note.
The so-called Russell rebalance day on Friday is intended to refresh the index provider’s look on the equity landscape for the next year in light of a year of record-setting trends and an extended post-election bull market rally that may have helped lift some components more than others.
Most notably, financials and energy shares over the past year will see the most notable changes in the indices, especially in the wake of Donald Trump’s surprise presidential election day win and the ongoing fallout in crude oil prices on an extended global supply glut.
Moreover, the growth style has outstripped the value style this year as investors jumped on the momentum in the equities market to ride the markets toward record highs.
“A shift in style towards growth stocks—companies whose prices tend to be based on potential opposed to actual earnings—in both the large-cap and small-cap segments of the market is often an indication of an optimistic market sentiment,” Mat Lystra, senior research analyst for FTSE Russell Indexes, said in a note.
Lystra pointed out that the excess returns of the two value and growth styles saw a significant divergence at the end of 2016. These growth stocks with higher betas are more volatile and viewed by some as riskier investments.