Why the trading volume increases many times on/around Russell Rebalance?
As per Wikipedia, "Due to the huge program trading volume needed to rebalance index funds, the day of the "reconstitution" is often one of the busiest trading days of the year in US equity markets." Why is a huge trading volume needed to rebalance? Can't it be done on previous day's Market Cap.?
Also, why is this index so important as compared to others?
- 1 decade agoFavorite Answer
Indexes like the Russell indexes are constantly changing the firms that are included in their indexes. Those indexes are also market capitalization weighted indexes so whenever the float (number of shares in circulation) changes from share buybacks, option exercises, etc. the indexes must be rebalanced to mirror the new "weight" of that firm compared to the others. Unless there is a relatively large float change (I believe more than 5%) in between typical rebalancing cycles, the indexes rebalance on a quarterly basis.
Any mutual fund or ETF that is based on that particular index will need to make trades in order to make sure that it doesn't drift too far from the index. That's why there is so much trading around rebalancing days.
As for why the Russell indexes are important - the DOW (30 stocks) and the S&P (500 stocks) are an indication of how the large capitalization stocks in the US are doing. The Russell indexes give one a better idea about mid caps and small caps as well. If one wants exposure to smaller companies then these indexes are better suited than the more narrower large cap indexes mentioned above.
- Anonymous4 years ago
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