Sunday, June 14, 2009

Russell Index Reconstitution

On average, when companies are added to the Russell indices, the share prices allegedly increase 47%, as indexed mutual funds have to buy them for their funds. And share prices for companies that fall out of the index fall 27%. I have yet to substantiate these claims, although they seem plausible.

Inclusion into the Russell indices are predicated on the objective criteria of market capitalization, so there's no room for manipulation. Companies who get included naturally experience a rise in share prices, and it becomes self-fulfilling as index funds buying in increase more buying pressure. As an aside, it's somewhat comforting to see a handful of companies I own be included in the index.

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