Tech to see weighting bump in Russell rejig

NEW YORK: The large-cap technology sector is expected to see a bump in its growth weighting when index provider FTSE Russell completes the annual refresh of its benchmarks on Friday, a move that could lift tech shares targeted in the rejig.

The increased significance of tech comes on the heels of an around 20 per cent gain in the sector this year, which led to a pullback over the last week.

FTSE Russell finalises its annual refresh of its widely-followed indexes on Friday, a move that prompts fund managers to adjust their portfolios to reflect new weightings.

Large-cap tech is expected to see a more than three per cent weighting increase in Russell’s growth index, a major benchmark for portfolio managers. After a brief classification as a partial value stock last year, Apple Inc is set to be once again classified as 100 per cent growth.

Some managers may be uncomfortable about having such a heavy growth weighting in tech, but they will have little leeway if they are benchmarked to a universal index.

At the other end of the spectrum, large-cap healthcare and consumer discretionary are expected to see the biggest weighting bumps in Russell’s value category according to Jefferies, with increases of 2.6 and 2.4 per cent, respectively.

“If you think of style, you think of whatever has worked in the year goes back to growth and whatever hasn’t worked goes back to value,” said Steve DeSanctis, equity strategist at Jefferies, here. “It’s not a fair assessment, but at the margin that is kind of the driver.”

Investors looking to trade on volatility may find some relief on Friday when Russell’s refresh typically drives the largest trading day of the year. Credit Suisse currently anticipates roughly US$49 billion (RM209.6 billion) in share turnover for this year’s rebalance.

FTSE Russell maintains some of the most widely followed benchmarks in the United States with US$8.6 trillion in assets tracking or invested in products that follow its indexes, according to the firm.

On an individual basis, nearly 400 companies would be affected by the rebalance, according to Ivan Cajic, head of index research at ITG, here.

“This year there are 10 additions and two deletions from the Russell 1000 so it is a much larger trade in the Russell 1000 space,” said Cajic.

Unlike Standard & Poor’s, which refreshes its indexes on a rolling basis, Russell’s reconstitutes its indexes just once a year.

As the CBOE volatility index has languished below 20 since the US presidential election, investors will also welcome the boost in liquidity the rebalance provides.

“You might not necessarily have only indexers present in this year’s rebalance and the days leading up to it,” said Cajic.

One widely-followed stock that will not be joining a Russell index yet is Snap Inc.

Due to the company’s unusual share structure, Russell is withholding a decision until after the rebalance until an analysis and comment period from the investment community is completed.

“We need to look at it because there is a potentially a trend for these types of offerings, particularly technology companies,” said Mat Lystra, senior research analyst at FTSE Russell in Seattle. Reuters