What is the Russell 1000?
- Real Vision
- March 23, 2023
The Russell 1000, a subset of the Russell 3000, is a large-cap stock index consisting of the largest 1,000 publicly listed U.S. companies, ranked by market value. Despite the index having only a third of the stocks in the Russell 3000, which covers 96% of the U.S. investable stock market universe, it still offers a broad representation — 93% of the stock market. FTSE Russell, a wholly owned London Stock Exchange Group subsidiary, established the Russell 1000 on January 1, 1984.
By providing a 93% representation of the entire stock market, the Russell 1000 offers a reliable benchmark for investors. In addition, the index overweights large-cap stocks due to its market-weighted composition, tracking the performance of the most stable and profitable U.S. companies. In the second quarter, it is reconstituted annually to include growing companies and recent IPOs.
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The Russell 1000 — Construction and Methodology
The Russell 1000 offers an unbiased representation of U.S. large-caps because FTSE Russell re-evaluates the companies held in the index annually to ensure accuracy. As a subset of the Russell 3000 index, the Russell 1000 inclines toward large-cap companies, whereas the Russell 2000 has more mid-cap and small-cap holdings. In its composition, all eligible stocks are ranked based on market capitalization, from the highest to the lowest. The first 1,000 stocks are placed in the index and weighted based on market value.
The first step in constructing the Russell 1000 index is screening for all eligible stocks. First, a company must be in the U.S. equity market for inclusion in the Russell indices. Russell assigns each stock to a specific country after considering factors such as headquarters, asset location, and its primary stock exchange. Only companies that qualify as U.S. entities form the larger Russell 3000E, which produces all other smaller Russell U.S. equity indices such as the Russell 3000 and Russell 1000.
Beyond the country criteria, there are several requirements each holding needs to meet before addition to the Russell 3000E:
- The stock must trade on an eligible exchange such as NYSE American, NYSE, Nasdaq, NYSE Arca, and CBOE (Chicago Board Options Exchange). The index cuts off those that trade over-the-counter (OTC), on pink sheets or bulletin boards.
- Stocks must meet a minimum capitalization of $30 million and close at or above $1 per share on the rank day.
- A stock must have at least 5% of its total float available for trading.
Finally, the Russell indices exclude company structures such as business development companies (BDCs), real estate investment trusts (REITs), limited partnerships, and special purpose acquisition vehicles (SPACs). Also, it omits share types such as preferred and warrants. After a stock passes all the requirements above, it becomes part of the Russell 3000E, the broadest U.S. index that includes up to 4,000 of the largest U.S. equity securities.
Consequently, all holdings in the Russell 3000E are ranked in descending order by market capitalization, from the largest to the smallest, and the largest 3,000 stocks form the Russell 3000. The Russell 3000 creates two major indices: the Russell 1000, which holds the top-ranked 1,000 companies, and the Russell 2000, which contains 2,000 mid-caps and small-caps stocks from rank 1,001 to 3,000. The 1,000 stocks in the Russell 1000 index are assigned a percentage weight based on their market capitalization ratio to the whole group’s total.
Each year in May, a reconstitution of the Russell 1000 index takes place. Price fluctuations cause increases or decreases in the market values, hence distortion of the index rankings and weightings. Furthermore, recent IPO listings may be eligible, and some index constituents might have undergone mergers, acquisitions, or gone private. Due to these market changes, the index needs to be adjusted periodically to restore constituents’ accuracy and rankings. Typically, ranking happens in May, and reconstitution of the index occurs on the last Friday of June. Stocks that move into the top 1,000 join the index, and some drop out due to market-cap shrinkage or failing to meet other set eligibility criteria such as exchange requirements.
As of December 31, 2022, the largest stocks in the Russell 1000 index were Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Berkshire Hathaway Inc. (BRK.B), Alphabet Inc. Cl A (GOOGL), UnitedHealth Group Inc. (UNH), Alphabet Inc. Cl C (GOOG), Johnson & Johnson (JNJ), ExxonMobil Corp. (XOM), and JPMorgan Chase & Co. (JPM). Performance-wise, the Russell 1000 has had a 10-year average annual return of 12.37%. Investors can try to mirror the Russell 1000 index performance through mutual funds and ETFs. Mutual funds such as the Vanguard Russell 1000 Index Fund (VRNIX) provide active exposure, and exchange-traded funds (ETFs) such as the Vanguard Russell 1000 ETF (VONE) and iShares Russell 1000 Index (IWB) passively track the performance of the index.
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The Russell 1000 Growth Index
Several focused indexes created from the Russell 1000 pick stocks on equity factors such as value and growth. These multiple styles allow investors to express their investment views or strategies by picking benchmarks that reflect their philosophy and outlook. Examples are the Russell 1000 Pure Value Index and the Russell 1000 Growth Index.
The Russell 1000 Growth Index consists of the higher growth and positive cash flow companies in the Russell 1000. It selects companies with higher two-year forecasted earnings growth from Institutional Broker’s Estimate System (IBES), a database maintained by Thomson Reuters containing future earnings estimates made by stock analysts. Also, stocks must show a relatively higher five-year historical sales growth to qualify.
FTSE Russell launched the index on January 1, 1987, to provide concentrated exposure to Russell 1000 stocks with strong growth characteristics. As of December 31, 2022, the Russell 1000 Growth Index held 512 stocks with a median market capitalization of $14 billion. The top ten constituents were Apple, Microsoft, Amazon, Tesla, Alphabet Class A, Alphabet Class C, United Health, NVIDIA, Visa, and Mastercard. In the past ten years, the Russell 1000 Growth index has outperformed the Russell 1000, highlighting the importance of growth as an equity factor. Several ETFs track the performance of this segment. For example, iShares Russell 1000 Growth ETF (IWF) tracks this index, offering similar performance based on U.S. large-cap growth stocks with a relatively higher growth rate than the market.
In conclusion, the Russell 1000 is a large-cap equity index tracking the performance of the investable universe of large U.S. companies. An annual rebalance in June by the Russell Group ensures an accurate representation of the market. Investors who want exposure to large-cap U.S. stocks can try for similar performance to the index through ETFs like VONE.