It could be a big end of the week for health care stocks as the Russell indexes plan to reconstitute themselves on June 26.
The annual event takes place at the end of the fourth Friday of every June.
Stocks are added or deleted from Russell’s family of indexes, including the Russell 1000 large-cap and Russell 2000 small-cap, prompting fund managers to adjust portfolios to reflect new weightings and components.
Russell bases the placement in the indexes on a number of factors, including market capitalization, voting rights requirements and country of domicile.
Telegraphing the reconstitution can create additional buying and selling stocks. Some investors may use the additional liquidity to take advantage of any resulting price dislocations, or to adjust the holdings in their portfolios, especially in smaller companies that have much lower liquidity.
The resulting surge in trading volume crests right before market close. FTSE Russell says more than $15 trillion is currently benchmarked to its indexes globally, and about $9 trillion to its U.S. indexes.
Teladoc (NYSE: TDOC), which offers virtual health care services, has risen more than 130% this year and is widely expected to be promoted to the Russell large-cap index. Home fitness provider Peloton is likely to be added directly to the Russell 1000. Of the six initial public offerings being added to the Russell 2000, all belong to the healthcare space.
Jefferies anticipates the health care weight in the Russell 2000 to decrease by 1.7% as a result of these promotions, while forecasting the health care weight in the Russell 2000 growth index at 33%, with 17% due to biotech names.
The firm sees the weighting for health care increasing by 5.9% in the Russell Midcap growth index and 1% in the Russell 1000 growth index.