If you follow Small-Caps, then you are probably aware of what just happened Friday and in the weeks leading up to the annual rebalancing of the Russell Indexes. For those not entirely familiar, I will explain the process and discuss an investment strategy that follows what is clearly "dumb money" selling out small-caps with no regard for valuation. With the market most likely still mired in a correction, fishing around for beaten up stocks is most likely a good use of time.
Russell Indexes: How They Work
Based in Tacoma, Washington, Russell Investments, owned by Northwestern Mutual Life, was founded in 1936. Many investors may be familiar with their role as the creator of the Russell Global Indexes, which have about $4 trillion in assets benchmarked to them according to the firm, but the company is also an asset manager, managing $152 billion.
When it comes to indexes, Standard & Poor's is the most popular provider for Large-Caps (S&P 500), while Russell wins for Small-Caps with its Russell 2000 index (IWM). You can see a complete list of their U.S. indexes here and click through to their global ones as well. A major difference between Russell and S&P is how the two organizations approach changes in the indexes. S&P has a committee that makes changes at various times, while Russell, for the most part (IPOs and corporate actions are the exceptions), makes an annual ranking and rebalances the index at the end of June (since 1989) in a process known as "reconstitution".
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LINK TO EXCEL FILE: Download R2000 Deletions 2013