U.S. Index construction & methodology
Russell produces a family of market cap-weighted U.S. equity indexes. All U.S. indexes are subsets of the Russell 3000E™ Index, which represents approximately 99% of the U.S. equity market.
- Act as a performance standard for active managers.
- Serve as a proxy for asset allocation purposes.
- Become a purchasable and replicable vehicle for passive investment strategy.
Determining index membership
- Rank the U.S. common stocks from largest to smallest market capitalization at each annual reconstitution period (May 31).
- Top 3,000 stocks become the Russell 3000® Index.
- Largest 1,000 stocks become the Russell 1000® Index.
- Next 2,000 stocks become the Russell 2000® Index.
- The smallest 1,000 in the Russell 2000 Index plus the next smallest 1,000 comprise the Russell Microcap Index.
Determining style index membership
- Rank each stock in the Russell 1000 and Russell 2000 by respective variables to determine Valuation (Growth/Value) or Stability (Defensive/Dynamic) styles.
- Valuation style variables: book-to-price ratio to represent value and I/B/E/S forecast medium-term growth and historical sales per share growth to represent growth.
- Stability style variables: EPS variability, ROA, and debt-to-equity to represent quality and total return volatility over two time periods to represent volatility.
- Combine variables to create a composite value score (CVS) for each stock. To ensure that turnover remains low, Valuation style implements a band of +/- .10 at the CVS level to prevent the occurrence of smaller, less meaningful movements.
- Rank the stocks by their CVS and apply a non-linear probability algorithm to the distribution to determine style membership weights. Roughly 70% are classified as all value or all growth and 30% are weighted proportionately to both value & growth.
- Stocks trading below $1.00.
- Pink sheet and bulletin board stocks.
- Closed-end mutual funds, limited partnerships, royalty trusts, etc.
- Foreign Stocks and American Depositary Receipts (ADRs).
- REIT's and PTP's that generate or have generated UBTI.
- Stocks with a market capitalization of under $30 million.
- Adjust shares outstanding for cross ownership and privately held shares to reflect shares available for trading.
- Adjust book value due to FAS 106 & 109 write-offs when determining price-to-book ratio for style classification.