Here's Why JCPenney, Yelp, and Others Were Removed From the Russell 1000

Major companies are set to be pushed out of the Russell 1000 Index Friday as the Russell Investment Group evaluates what companies have a high enough market cap to be a part of the index's rank.

Major retailers like JCPenney JCP and Dillard's DDS and tech companies like Yelp YELP and Groupon GRPN will leave the Russell 1000, while growing companies like Advanced Micro Devices, Inc. AMD are set to join the Russell 1000.

The Russell Indexes

The Russell 3000 Index is an index weighted by market capitalization, or the companies with the largest market value. It is maintained by the Russell Investment Group which strives to make the index the benchmark for the entire U.S. stock market.

The Russell 3000 has two subset indexes: the Russell 1000 and the Russell 2000. The Russell 1000 Index is based on the 1,000 largest companies in the Russell 3000 and the U.S. market, comprising over 90% of the total market capitalization of all listed U.S. stocks. The Russell 2000 Index comprises of the remaining small cap companies from the Russell 3000 not included in the Russell 1000.

Stocks within the Russell 3000 Index are reconstituted once a year, usually around June. At this time, the companies are re-ranked based on their market cap for the previous year. As a result, companies that have maintained their market value will stay in their current residing index, while others may move up to the Russell 1000 or down to the Russell 2000 accordingly.

What Companies Are Moving Up or Down

This year, some major companies are moving down from the Russell 1000 to the Russell 2000. For instance, JCPenney, whose market cap has shrunk to $1.4 billion, and Dillard's, which is down to $1.5 billion, will be moved to the Russell 2000. Major tech companies are also going down to the Russell 2000, including Groupon, Yelp, and Fitbit FIT.

Many energy stocks are also moving to the Russell 2000 this year. The Russell 1000 RGS Energy Index is down 15.2% since the start of 2017 and down 9% since last June. This makes it likely that energy companies will shift from the Russell 1000 to the Russell 2000, including companies such as Diamond Offshore DO, Noble NE, Ensco ESV, Rowan RDC, and Penn Virginia PVAC.

However, other companies are graduating to the Russell 1000. For instance, AMD had a very good year with its shares going from $5 to $14 in 12 months. This year has also been successful for financial companies, as the Russell 1000 Financial Services Index is up 21% since last June. Various financial companies are expected to replace the energy stocks leaving.

The Impact

This reconstitution of the Russell Index makes a huge difference in the stock market because many major mutual funds and ETFs are benchmarked to these indexes, such as the Vanguard Russell 2000 ETF VTWO. In total, $8.5 trillion is invested in products based on the Russell U.S. indexes.

Consequently, these investors buy stock from the companies that the Russell Index includes or sell based on what the index removes. Investors will be working to rebalance their portfolios, wanting their investments in various sectors to be proportional to the Russell 1000 Index.

As the Russell Investment Group works to reconstitute their indexes, investors will sell some major companies and buy shares of newer, growing companies. When this happens, some companies' stock will be bought by new investors and will continue to grow, while those leaving the Russell 1000 may not recover.

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