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 1000 Index

    The Russell 1000 Index is an index of approximately 1,000 of ...
  2. Russell Top 50 Index

    A market capitalization weighted index of the 50 largest stocks ...
  3. Russell 3000 Value Index

    A market-capitalization weighted equity index maintained by the ...
  4. Russell Microcap Index

    The Russell Microcap Index is an index of 2,000 small cap and ...
  5. CBOE Russell 2000® Volatility Index ...

    The CBOE Russell 2000® Volatility Index is an indicator of the ...
  6. Russell 2500 Index

    The Russell 2500 Index is a broad index, featuring 2,500 stocks ...
Related Articles
  1. Investing

    Russell Rebalance Study: What You Need to Know

    Analyze the recent stock performance for different types of stocks to determine which equities could gain or benefit ahead of Russell index reconstitution.
  2. Investing

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

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

    DIA vs. IWL: Comparing ETFs with the Largest U.S. Companies

    Find out how the SPDR Dow Jones Industrial Average ETF compares with the iShares Russell Top 200 as mega-cap exchange-traded funds.
  4. Investing

    Build A Model Portfolio With Style Investing

    This sophisticated approach will add flair to your returns.
  5. Insights

    An Introduction to Stock Market Indices

    Lear more about the five most talked about stock indices and what makes them all different.
  6. Investing

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  7. Investing

    The 3 Best ETFs to Short Small-Cap U.S. Equities (SBB, TWM)

    Get analyses of the top three ETFs to short the U.S. small-cap equity market, and learn about their characteristics and historical performances.
  8. Investing

    5 Things You Need To Know About Index Funds

    Index funds, at their best, offer a low-cost way for investors to track popular stock and bond market indexes. But not all index funds are created equally.
  9. Insights

    Apple Loses Weighting in the Russell Index (AAPL)

    Apple's weighting in the Russell 1000 will be reduced resulting in shares being sold
RELATED FAQS
  1. What are the most important equity market indexes?

    Discover the most important equity market indexes. Stock market indexes are tools to evaluate the performance of the stock ... Read Answer >>
  2. Why can you short sell an ETF but not an index fund?

    To answer this question, we should first define exactly what an index fund is. An index fund is a mutual fund, or a basket ... Read Answer >>
  3. How do indexes determine which stocks are removed or added to them?

    Stock indexes are formed based on the kinds of stocks or financial securities they want to track. For example, the Standard ... Read Answer >>
  4. What are the pros and cons of using the S&P 500 as a benchmark?

    Learn about the advantages and disadvantages of using the S&P 500 as a benchmark for portfolio performance, and understand ... Read Answer >>
Hot Definitions
  1. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  2. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  3. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  4. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  5. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
  6. Capital Expenditure (CAPEX)

    Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial ...
Trading Center