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Q & A
Q: How exactly do you determine which stocks are in the various style indexes?
A: To determine the components of the Russell 2000® Growth and Russell 2000® Value Indexes, we rank all the companies in the Russell 2000® Index according to a number of factors, including their earnings-growth expectations and price/book ratios. Then we divide them into three groups. The 35% with the highest rank based on factors like earnings expectations and price/book ratio go into the Russell 2000® Growth; the 35% with the lowest rank go into the Russell 2000® Value. We then allocate fractions of the remaining stocks into both the Value and Growth Indexes. Stocks that fall close to the Growth "border" might have (for example) 85% of their capitalization included in the Growth Index, with the remaining 15% in the Value Index. Stocks closer to the Value border would have more weight in the Value Index and less in Growth. Stocks near the middle would be split 50/50.
Why such a complex series of divisions? If it was simply a matter of ranking the stocks, then slicing them right down the middle to determine the two style indexes, the cutoff between value and growth would be exceedingly dramatic. If a stock were right on the border, a very small change in its price/book ratio or earnings expectations could tip it from value to growth or vice versa. Similarly, if a very large-cap stock (that is, large as small cap stocks go) resided close to the border and its stock price fell, causing its price/book value to fall as well, the stock could be pushed into the value zone. We might have to shift as many as 200 securities from value to growth to keep the midpoint at the halfway point of total value in the 2000. By constructing the indexes as we do, we've sought to add a buffer zone (which we refer to as "mixed membership stocks") that will keep the indexes' composition from fluctuating wildly at every reconstitution. Our method also reflects the fact that growth managers do not exclusively buy growth stocks, and value managers do not exclusively buy value stocks. We wanted to make the style indexes, like the broader-market indexes, as practical and reliable a benchmark as possible.
Past performance is not a guarantee of future performance.
This is a publication of Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Frank Russell Company. Frank Russell Company, a Washington, USA, corporation, operates through subsidiaries worldwide.
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