Russell Bursting With Money-Losing Zombies After Today's Rebalance

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by Tyler Durden
Friday, Jun 25, 2021 - 01:04 PM

According to Reuters, today's annual Russell (1000, 2000 and 3000) rebalance (the final reconstitution is today) is the "biggest trading event of the year."

While that may be a modest exaggeration (see our preview here), it is certainly the case that small caps are increasingly important to a surging number of retail daytraders. Indeed, as Bloomberg also notes, normally, the annual rebalancing of FTSE Russell’s indexes is a big day for stocks moving in and out of the gauges and a non-event for investors whose asset allocation isn’t tied to the revamp. It’s a somewhat different story this year.

And while earlier today we shared some of the key highlights from today's rebal, including Goldman's best guesses and additions and deletions...

... Bloomberg points out a more ominous transformation in the broader index reconstitution noting that for small-cap investors, today’s reshuffle will mean a further deterioration in quality of the Russell 2000 Index’s components.

This is according to Jefferies’s Steve DeSanctis, who says the proportion of money-making companies in the index will fall to the lowest since 2000. Among the additions to the index is Chesapeake Energy which emerged from bankruptcy a few months ago. Another addition, drug developer Inotiv has been losing money for most of the past three years. The index’s largest member, AMC - the stock that’s also the biggest member of the iShares Russell 2000 Value ETF (yes, value) - has been losing money for seven quarters in a row, but that hasn't prevented a frenzy of retail buyers to push it up to all time highs.

In other words, after today the number of money-losing "zombies" in the Russell will be the highest it has been this century.

"The gap between the haves and the have-nots in the index is becoming wider, which will open a lot of opportunities for stock pickers on the right side of the trade,” DeSanctis, Jefferies’ strategist, told Bloomberg.

“You’re getting higher beta stocks and higher beta names. The volatility in the Russell 2000 will likely go up because of the universe of companies it will consist of.”

Elsewhere, another meme-stock sensation, GameStop, is graduating into the index of 1000 largest companies from the index of small caps. GME will see its weighting shrink to three basis points to leave room for megacaps like Apple and Microsoft in its new index home.

And while there is twice as much money benchmarked to the Russell 1000 Index than the Russell 2000, that won’t be enough to offset a 14-time compression in weighting the stock will undergo in a new gauge, according to Bloomberg. As a result, small-cap passive funds will sell 4.7 million shares of GameStop worth about $1 billion following the stock’s departure from the Russell 2000 Index, Jefferies estimates. Still, that’s just a fraction of the stock’s average daily volume of 27 million so far this year.

AMC Entertainment is staying in the Russell 2000 Index, cementing its position as the largest member of the gauge. The demand for AMC from passive funds will be around $120 million, or just under 2.1 million shares, estimates compiled by Daniel Martucci, Instinet LLC’s index analyst for Americas, show.

Finally, overall volumes wtill be staggering: the sheer size of the stock market that will get bought and sold in the last few minutes of the day to account for the indexes’ revamp - the figure strategists at Jefferies LLC pin near $160 billion - will likely mean that every corner of the stock market will react. The figure stood at $100 billion last year, when 17.8 billion shares changed hands, the fifth-highest so far in the year.