Investors are doubling down on technology, whether they realize it or not.
The annual reconstitution of the Russell Index, a leading benchmark for index funds, will take place after the close of trading on Friday.
Russell 3000,
well known
Russell 2000
Small and medium-sized enterprises
Russell 1000
The conglomerate group is set to further increase its exposure to many of the top technology stocks with a presence in the fast-growing artificial intelligence market.
According to figures from index provider FTSE Russell, the Magnificent Seven in the technology industry are Microsoft
,
apple
,
NVIDIA
,
alphabet
,
Amazon
,
Meta Platform
,
The two companies, including Tesla, account for nearly a quarter of the total market capitalization of the Russell 3000 index, which is $53 trillion.
The seven stocks' combined market capitalization had risen nearly 44% year-over-year to $13.2 trillion as of April 30, the day FTSE Russell ranks companies to determine the composition of all its indexes. The company released a preliminary list of additions and deletions to its indexes in late May and is releasing weekly updates through the end of June.
The annual rebalancing will affect the portfolios of many mutual funds and exchange-traded funds from big asset managers like Vanguard, iShares and Fidelity that are benchmarked to the Russell 1000 and Russell 2000, as well as their related growth and value indexes. Holders of these funds will have greater exposure to technology.
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NVIDIA, the second-place performer, continues to grow rapidly.
S&P 500
The rise in other major tech stocks so far this year has made Russell's large-cap-oriented Russell 1000 Growth Index more reliant on the widespread adoption of AI.
,
of
S&P 500 Index
The company, a top stock for 2024, will be promoted from the Russell 2000 to the Russell 1000 after the rebalancing.
Nvidia's rise
Technology Select Sector SPDR
Exchange-traded fund. After a recent rebalancing, NVIDIA is now the ETF's second-largest holding, accounting for nearly 21%. Microsoft is the ETF's largest holding, accounting for 22%. Apple is a distant third, accounting for 4.5% of the fund.
So are the major market indexes too reliant on AI stocks? Probably so. But it's worth noting that the market has held up relatively well recently, even as Nvidia experienced bigger volatility after its stock split this month.
Investors seem to be realizing that there's more to AI than NVIDIA.
Russell 1000 Growth Index,
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The same goes for other incidental movements along the trend.
“Artificial intelligence has moved beyond buzzword status and is rapidly being integrated into businesses across the economy, from healthcare to finance and more,” said Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock.
,
The iShares owner said in a mid-term outlook:
“Semiconductors, data centers and even raw materials like copper are becoming essential to the growth of AI,” Jacobs said, citing “enormous and immediate demands on hardware, digital infrastructure and power” that AI adoption will create.
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The Russell rebalance may pose a bigger problem for value managers, according to a report published last month by Patrick Palfrey, U.S. equity strategist at UBS. “The biggest value stocks may come under some selling pressure” after the Russell rebalance as its concentration in growth stocks continues to increase, he said. Fund managers will likely need to sell some shares of companies in value-oriented, cyclical industries, such as financials and industrials, to reflect their new lower weightings in the Russell indexes.
The increased likelihood of the Federal Reserve cutting interest rates this year could “amplify momentum led by large-cap growth stocks,” Jeff Schultz, head of economic and market strategy at ClearBridge Investments, wrote in a recent blog post.
Schultz noted that in soft economic landings going back to 1980, the Russell 1000 growth index rose an average of 16% in the 12 months following the Fed's first rate cut.
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That's better than the returns of the Russell 1000 Value, Russell Midcap, which includes the 800 smallest companies in the Russell 1000, and the Russell 2000 index. Large growth stocks outperformed large value and midcap stocks during the recession, roughly matching the gains of small caps during the downturn.
So while there's no denying that the stock market is heavily biased towards AI leaders and the tech sector in general, investors don't seem too worried: They're continuing to ride the momentum.
Write to Paul R. La Monica at paul.lamonica@barrons.com
