Spring Ritual

Article excerpt

Who's In and Who's Out on the Russell 3000 Index

Every spring, a number of publicly traded community bank stocks see their trading volume spike as new institutional investors buy or sell their shares. Generally, institutional investors make decisions to buy and sell based on the underlying fundamentals of the companies they trade. But every June, when the Russell 3000 Index "reconstitutes" or rebalances, investors are forced to buy or sell certain companies based solely on market capitalization.

The Russell 3000 Index is a broad, market capitalization-weighted index that tracks a large portion of the investable U.S. equity market. In simple terms, the index is comprised of the stocks of the 3,000 largest U.S. companies based on market capitalization. The index is reconstituted once a year at the end of June, with publicly traded companies automatically added or removed based on their market capitalizations on the last trading day of May.

This year, a number of community banks and thrifts are poised to be affected by the next Russell 3000 Index reconstitution. Based on a recent analysis of eligible stocks, a significant number of community banks and thrifts (84 when ICBA Securities Capital Markets conducted the research last fall) could be added to the index. Conversely, our researchers found only eight banks and thrifts that would likely be removed from the index. (Of course, many factors could change between now and May that could affect these numbers.)

Who Is Eligible?

Only companies incorporated in the United States, its territories and a select group of other countries are eligible for inclusion in the Russell 3000 Index. Companies must be listed on a major U.S. exchange to qualify for listing. Therefore, bulletin board, over-the-counter and pink sheet-traded securities are not eligible.

In addition, certain types of companies are excluded from eligibility, including royalty trusts, limited liability companies, closed-end investment companies, blank check companies, special purpose acquisition companies and limited partnerships. Because the index tries to capture the performance of each company's primary equity vehicle, it does not list companies that issue the following four types of shares: preferred and convertible preferred, redeemable shares, warrants and rights, and trust receipts.

Each company's stock price must trade at or above $1 on the last trading day of May to qualify for inclusion. And initial public offerings can be added to the index at the end of the quarter in which they price, if the initial public offerings meet certain criteria on the final day of the quarter.

What Does This Mean?

Historically, being added to the Russell 3000 Index was considered a positive development because it spurred more institutional interest in the company's shares. That extra attention alone tended to increase share price and trading volume. Generally speaking, companies added to the index also experience a boost in share price just prior to the reconstitution date as investors speculate as to which companies they think will join the Index. …