Reconstitution

AAA

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.

INVESTOPEDIA EXPLAINS '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. Capitalization-Weighted Index

    A type of market index whose individual components are weighted ...
  2. Russell 3000 Index

    A market capitalization weighted equity index maintained by the ...
  3. Russell 1000 Index

    An index of approximately 1,000 of the largest companies in the ...
  4. Capitalization

    1. In accounting, it is where costs to acquire an asset are included ...
  5. Index

    A statistical measure of change in an economy or a securities ...
  6. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
Related Articles
  1. ETFs Vs. Index Funds: Quantifying The ...
    Mutual Funds & ETFs

    ETFs Vs. Index Funds: Quantifying The ...

  2. Using Mutual Funds To Profit From Market ...
    Options & Futures

    Using Mutual Funds To Profit From Market ...

  3. The Lowdown On Index Funds
    Options & Futures

    The Lowdown On Index Funds

  4. Your Mutual Fund: It's Riskier Than ...
    Mutual Funds & ETFs

    Your Mutual Fund: It's Riskier Than ...

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center