The Russell Index Trade

Market players will be busy today trading the stocks that will be added or deleted from the Russell Indexes. This event happens annually and investors who wish to take advantage should focus on buying the companies that are being added and shorting the stocks that are due to be deleted.



Exchange traded funds and mutual funds that track the indexes must rebalance their portfolios to match these additions and deletions so this one of the few market events that you can predict with reasonable certainty which stocks will have above average buying or selling. For a complete list of which stocks, refer to these links. (Additions, Deletions) For a complete description of the process refer to this link (Russell 3000 reconstitution).



In the past traders have taken advantage of the buy or sell imbalances near the close of the trading day that the rebalancing takes place, which takes place later today. This year will see about 277 changes to the index so there is no shortage of ideas for investors looking for new positions. Also, investors need to recognize the fact that the changes are made because the newer stocks that are added are considered to be better representations of their industry groups while the stocks that are deleted are no longer in favor as industry group representatives.



This link examines what happened in 2002 when the S&P 500 changed 9 components in it's index and the performance of those stocks around the rebalancing date. (SP500 rebalance).



Investors who are new to the game should proceed cautiously with regards to this market strategy unless they have the tools to see exactly which stocks are experiencing imbalances prior to close of the trading day. However, if an investor has a longer term objective, this event can help confirm any decisions of whether to buy, hold or sell the stocks involved.



Finally, while I was surfing the net to get information for this post, I came across David Neubert's post from 2006 in regards to this trade. (David's post)