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. 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

    A type of mutual fund with a portfolio constructed to match or ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
RELATED FAQS
  1. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  2. What are the most important equity market indexes?

    The most important equity market indexes are the S&P 500, Nasdaq Composite and Russell 2000. These indexes in total provide ... Read Full Answer >>
  3. What is the 12b-1 fee meant to cover?

    A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>
  4. What is the difference between a smart beta fund and an index fund?

    An index fund often uses the market capitalization of component companies as the basis for constructing the index. In contrast, ... Read Full Answer >>
  5. What is the difference between the QQQ ETF and other indexes?

    QQQ, previously QQQQ, is unlike indexes because it is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. The ... Read Full Answer >>
  6. What is the QQQ ETF?

    The PowerShares QQQ, previously known as the QQQQ, is a widely held and traded exchange-traded fund (ETF) that gives investors ... Read Full Answer >>
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. Options & Futures

    Using Mutual Funds To Profit From Market Dips

    Stop hoping for the indexes to go up and start investing in the reverse.
  3. 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.
  4. 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.
  5. Mutual Funds & ETFs

    Beware The Index Hugger

    These funds put the squeeze on your money. Don't pay for service you're not getting.
  6. Professionals

    Why ETFs Often Edge Out Mutual Funds

    A deep look reveals why — in most instances — ETFs beat out mutual funds.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares S&P 500

    Find out more about the iShares Core S&P 500 Exchange Traded Fund, the characteristics of this ETF and the suitability of the iShares Core S&P 500 ETF.
  8. Stock Analysis

    Where Will the Shanghai Composite Be in a Year?

    The Shanghai Composite Index is on fire. But where will it be a year from now?
  9. Investing Basics

    S&P 500 Vs. Russell 2000 ETF: Which Should You Get?

    We look at the differences of investing in the S&P 500 vs. the Russell 2000 exchange-traded fund, and when to choose the one over the other.
  10. Professionals

    Indexing vs. Stock Picking: Which is Better Now?

    Indexing and stock picking both have positive and negative features. One has outperformed the other historically, but which is the better option right now?

You May Also Like

Hot Definitions
  1. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  2. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  3. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  4. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  5. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  6. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!