Reconstitution

DEFINITION of 'Reconstitution'

A reevaluation of a market index that involves adding and removing stocks and re-ranking existing stocks so that the index mirrors current market capitalization and style.

The Russell indexes are well known for their annual reconstitution. To reconstitute the Russell indexes, all publicly traded stocks are ranked by market capitalization. Stocks that are ineligible for inclusion in the indexes are weeded out, and the new indexes are formed.

BREAKING DOWN 'Reconstitution'

Because many index funds track the Russell indexes, the Russell reconstitution has a ripple effect that changes the constitution of many index funds and affects investors' holdings and the prices of many stocks. Some advanced investors, particularly hedge-fund mangers, try to profit from the impending changes by guessing which stocks will be added, removed or switched to a different index and trading in those stocks. Russell's transparent stock-picking methodology makes educated guesses about these changes possible.

RELATED TERMS
  1. Russell 2000 Index

    An index measuring the performance approximately 2,000 small-cap ...
  2. Index

    A statistical measure of change in an economy or a securities ...
  3. Capitalization

    1. In accounting, it is where costs to acquire an asset are included ...
  4. Capitalization-Weighted Index

    A type of market index whose individual components are weighted ...
  5. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
Related Articles
  1. Mutual Funds & ETFs

    ETFs Vs. Index Funds: Quantifying The Differences

    If you are trying to choose between these two index-tracking investments, compare the costs.
  2. Mutual Funds & ETFs

    DWAS: PowerShares DWA SmallCap Momentum ETF

    Find out about the PowerShares DWA SmallCap Momentum Portfolio ETF, and explore detailed analysis the fund's characteristics, suitability and recommendations.
  3. Options & Futures

    Using Mutual Funds To Profit From Market Dips

    Stop hoping for the indexes to go up and start investing in the reverse.
  4. Options & Futures

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.
  5. Mutual Funds & ETFs

    Your Mutual Fund: It's Riskier Than You Think

    Fund managers often take on more risk than they should, putting business ahead of fund holders' interests.
  6. Mutual Funds & ETFs

    Beware The Index Hugger

    These funds put the squeeze on your money. Don't pay for service you're not getting.
  7. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  8. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
  9. Investing

    New Year, New Investing Strategy: Exploring ETFs

    Whether you’re a seasoned investor or new to the markets, you need to learn as much as you can about the present environment and how to navigate it.
  10. Mutual Funds & ETFs

    The 4 Best U.S. Equity Index Mutual Funds

    Find out which four index mutual funds are among the best U.S. equities index mutual funds for core holdings in your investment portfolio.
RELATED FAQS
  1. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  2. What fees are associated with target-date funds?

    Target-date funds have two types of fees. The first type of fee is paid to the company managing the fund and selecting the ... Read Full Answer >>
  3. Some of the Best No-load Funds to Consider

    Some of the most well-known no-load funds are the DoubleLine Total Return Bond Fund (DLTNX), Vanguard Short-Term Investment-Grade ... Read Full Answer >>
  4. Can mutual funds fail?

    Mutual funds can fail. Unlike bank accounts, there is no Federal Deposit Insurance Corporation (FDIC) or similar agency that ... Read Full Answer >>
  5. How do mutual fund managers make money?

    Mutual fund managers get base salaries, which vary greatly depending on the size and pedigree of the fund company. They may ... Read Full Answer >>
  6. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center