Excess Reconstitution-Day Volume

By: Alex Chinco and Marco Sammon

Format:Print
| Language:English

Abstract

FTSE/Russell reconstitutes its Russell 1000 and 2000 indexes on the last Friday of June each year, and it announces which stocks will switch indexes roughly two weeks in advance. Exchange-traded funds (ETFs) must do all of their rebalancing on Russell’s reconstitution day, but other kinds of funds (mutual funds, pension funds, endowments, etc) could use this two-week period to gradually rebalance. Textbook models suggest that some non-ETFs should take advantage of this opportunity. Yet index-switcher volume does not increase at all during the period prior to Russell’s reconstitution day. It suddenly spikes on reconstitution day with 3:15x more volume than can be explained by ETF rebalancing alone. The existence of so much excess reconstitution-day volume suggests that there are important economic forces missing from existing models of index investing. It is as if all Russell-linked funds are trading like ETFs even though most of these funds do not face the same end-of-day portfolio constraints that ETFs do.