Tech Dominance Over Russell 1000 to Hit Record Highs After Latest Reconstitution

By Joseph Adinolfi

As Friday's annual reconstitution begins, it's interesting to look at how the share of the largest U.S. companies in the index has grown over time.

This year's surge in tech and mega-cap stocks is expected to leave its mark on Friday, when the FTSE Russell conducts its final annual index reconstitution.

Once the reconstitution is complete, the 10 largest companies in the large-cap Russell 1000 RUI index are expected to see their combined weighting increase to 34.3%, the highest in the 40-year history of US FTSE Russell indices, according to Catherine Yoshimoto, Director of Product Management for Russell US Indices at FTSE Russell.

That represents a gain of nearly 20 percentage points since the large-cap index was launched on January 1, 1984, alongside its small-cap index, the Russell 2000 RUT, and its parent index, the Russell 3000 RUA.

This makes sense given how much these stocks have appreciated over the past year, largely driven by the AI ​​craze. According to FTSE Russell, the combined market valuation of the largest stocks has increased by nearly 50% since last year’s reconstitution. At this point, it’s no secret that the largest U.S. stocks have driven much of the market’s gains over this period, with one stock in particular—Nvidia Corp. (NVDA)—accounting for a disproportionate percentage of the gains.

But the American market has not always been as unbalanced as it is today. The data in the tables below show how the weighting of the 10 largest U.S. companies in the index has increased over time. They also show how the different companies at the top of the index have also changed.

   Constituent Name                         Weightings as of 6/26/2024  Constituent Name            12/29/2023  Constituent Name            6/30/2023  Constituent Name       12/31/2013 
   Microsoft Corp                           6.7%                        Apple Inc.                  6.5%        Apple Inc.                  7.0%       Apple Inc.             2.8% 
   Apple Inc.                               6.2%                        Microsoft Corp              6.4%        Microsoft Corp              6.2%       Exxon Mobil Corp.      2.4% 
   Nvidia Corp.                             6.0%                        Amazon.com                  3.1%        Amazon.com                  2.9%       Microsoft Corp         1.6% 
   3.6%                        Nvidia Corp.                2.7%        Nvidia Corp.                2.4%       Google Inc.            1.6% 
   Meta Platforms Inc                       2.2%                        Alphabet Class A            1.9%        Tesla Inc.                  1.8%       General Electric Co.   1.5% 
   Alphabet Class A                         2.2%                        Meta Platforms Inc.         1.8%        Alphabet Class A            1.7%       Johnson & Johnson      1.4% 
   Alphabet Class C                         1.8%                        Alphabet Class C            1.6%        Meta Platforms Inc          1.5%       Chevron Corp.          1.3% 
   Eli Lilly & Co                           1.5%                        Tesla Inc.                  1.6%        Berkshire Hathaway Class B  1.5%       Proctor & Gamble Co.   1.2% 
   Berkshire Hathaway Class B               1.5%                        Berkshire Hathaway Class B  1.5%        Alphabet Class C            1.5%       JPMorgan Chase & Co.   1.2% 
   Broadcom                                 1.4%                        Eli Lilly & Co              1.1%        UnitedHealth Group Inc.     1.1%       Wells Fargo & Co.      1.2% 
   JPMorgan Chase & Co                      1.1%                        JPMorgan Chase & Co         1.1%        Exxon Mobil Corp.           1.1% 
   Combined weight of 10 largest companies  34.3%                       29.2%       28.7%      16.0% 

While technology stocks have dominated the upper echelons of the market in recent decades, the situation was much different toward the end of the 20th century. Back then, the top companies included a handful of primarily consumer-focused names, as well as several companies focused on healthcare, industrials and energy.

The shift reflects the changing nature of the U.S. economy, according to Indrani De, head of global investment research at FTSE Russell.

“Indexes are a representation of the economy and, by the same logic, they capture trends in the underlying economy,” De said in an interview with MarketWatch.

   Constituent Name                         12/31/2003  Constituent Name                 12/31/1993  Constituent Name                 12/30/1983 
   General Electric Co.                     2.9%        General Electric Co.             2.4%        International Business Machines  4.8% 
   Pfizer Inc.                              2.6%        Exxon Corp.                      2.1%        Exxon Corp.                      2.1% 
   Exxon Mobil Corp.                        2.5%        AT&T                             1.9%        General Electric Co.             1.7% 
   Citigroup Corp.                          2.3%        Coca-Cola Co.                    1.6%        General Motors Co.               1.5% 
   Microsoft Corp.                          2.3%        Philip Morris Cos International  1.3%        AT&T                             1.1% 
   Intel Corp.                              2.0%        Merck & Co.                      1.2%        Standard Oil Co.                 1.0% 
   Cisco Systems Corp.                      1.6%        General Motors Co.               1.0%        Schlumberger Ltd.                0.9% 
   Johnson & Johnson                        1.4%        Proctor & Gamble Co.             1.0%        Sears, Roebuck & Co.             0.9% 
   American International Group             1.4%        Wal-Mart Stores                  0.9%        Eastman Kodack Co.               0.8% 
   International Business Machines          1.4%        GTE Corp.                        0.9%        DuPont de Nemours, Inc.          0.8% 
   Combined weight of 10 largest companies  20.4%       14.4%       15.7% 

Unsurprisingly, the technology sector has been the biggest beneficiary of the market’s growing bias toward mega-caps. This is no surprise, considering that the top three stocks – Microsoft, Apple and Nvidia – are all in the technology sector.

There have been notable changes in the sector. This year, Microsoft Corp. (MSFT) will regain its position as the index's top stock, which it lost to Apple Inc. (AAPL) in 2021.

Additionally, Nvidia leapfrogged Amazon.com Inc., while chipmaker Broadcom Inc. (AVGO) saw its ranking soar from 24th a year ago to 9th this year, making its debut in the top 10.

As of early this week, tech is on track to make up 36.1% of the index after the annual reconstitution is official on Friday, according to data provided by FTSE Russell. This would represent its largest share in the index's history, as well as a three-fold increase since the index's launch. At the start of 1984, technology stocks represented only 14.2% of the index, making technology the third largest sector after consumer discretionary and energy.

The growing dominance of very large market cap stocks also has other implications for the Russell indices. A certain number of companies are ousted from the growth index and reclassified in the “value” category to make way for the increased weight of the largest stocks.

The Russell Growth RLG and Russell Value RLV indexes will see an influx of new entrants, with 28 companies moving from the Russell 2000 to the Russell 1000, including Super Micro Computer Inc. (SMCI), Microstrategy Inc. (MSTR), and Carvana (CVNA). ). IPOs and splits will also see a handful of stocks join the large-cap index.

To be sure, things look different for the Russell 2000, where health care stocks, not technology stocks, will see the biggest increase in their weighting, largely due to a boom in biotech names in 2024.

Of the 243 new additions to the Russell 2000 — a combination of downgrades, IPOs and other new blood, and exits from the micro-cap universe — 41 are in the health care category.

One of the busiest days of the year

Russell's reconstitution day typically coincides with one of the busiest trading sessions of the year, as passive funds that track the indices reorganize their portfolios to match the indexes' new weightings.

Most of the frenzied activity is reserved for the closing auctions of the Nasdaq and the New York Stock Exchange, according to FTSE Russell. During last year's rebalancing, about $134 billion worth of stocks changed hands at the close.

“Expect Friday to be one of the busiest days of the year,” Jay Woods, chief global strategist at Freedom Capital Markets, said in emailed comments to MarketWatch earlier this week .

As of the end of 2023, approximately $10.5 trillion of passive and active money was tracking Russell's U.S. indices, according to FTSE Russell.

While fund managers have had more than a month to prepare for the rebalancing, it is possible that some of the index's biggest names could be shaken by the volatility, according to a team of UBS Group market strategists led by Patrick Palfrey.

Notably, Palfrey identified many high-profile names, including JPMorgan Chase & Co. and Berkshire Hathaway, as being potentially at risk of downside from rebalancing.

The Commerce Department will release its latest monthly PCE price index, the Federal Reserve's preferred inflation gauge, on Friday, which could add another element to Friday's rebalancing. Stocks could see big swings depending on what the data shows.

-Joseph Adinolfi

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06-29-24 0750HE

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