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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.
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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.
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Search results for 'Reconstitution'
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http://www.investopedia.com/ask/answers/08/kidder-peabody-joseph-jett.asp
... Jett had discovered a glitch in Kidder's computer system; it would record profits
on a forward reconstitution daily, even if the trades would be worthless upon ...
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http://stocks.investopedia.com/stock-analysis/2010/Corporate-Leaders-Earn-Your-Trust-INGBRK.ABRK.BXOMNIPFM0901.aspx
... With almost identical mandates, the ETF's quarterly rebalance and annual reconstitution
led to higher tax-related expenses and lower performance. ...
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http://www.investopedia.com/articles/financial-theory/banking-crisis-1980s.asp
... to the financial crisis of the 1980s, subsequent action by government also helped
rescue the sector and bring about its reconstitution, although fundamentally ...
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http://stocks.investopedia.com/stock-analysis/moneyshow/2FundstoProfitonValueandMomentum.aspx
... Russell 2000 funds have lost lots of money due to synchronized buying and selling
of relatively illiquid small-cap stocks during index reconstitution periods. ...
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