Ftse russell

FTSE Russell is a prominent global provider of financial market indices and related data solutions, integral to the investment management industry. As a wholly-owned subsidiary of the London Stock Exchange Group (LSEG), FTSE Russell creates, maintains, and licenses a vast array of equity, fixed income, and alternative asset class benchmarks used by investors worldwide. Its indices serve as critical tools for performance measurement, asset allocation, and the creation of various investment products, including exchange-traded funds (ETFs) and mutual funds. Approximately $16 trillion is currently benchmarked to FTSE Russell indexes, covering about 98% of the investable market across more than 70 countries.³⁶

History and Origin

The foundation of what would become FTSE Russell traces back to two distinct entities: the FTSE Group and Frank Russell Company. The FTSE Group, initially known as FTSE International Limited, was established in 1995 as a joint venture between the Financial Times and the London Stock Exchange Group (LSEG) to oversee stock market indices, most notably the FTSE 100 Index. LSEG later acquired full ownership of the FTSE Group in December 2011.³⁵

Separately, the Frank Russell Company was founded in 1936 in Tacoma, Washington, by Frank Russell. The company began as a stockbroker and consultant and is credited with pioneering pension consulting. In 1984, it launched the Russell 2000 Index, which would become one of the most widely followed indices for small-cap stocks in the U.S.

A significant consolidation occurred in June 2014 when the London Stock Exchange Group agreed to acquire the Frank Russell Company for approximately $2.7 billion.³³, ³⁴ This acquisition was the largest in LSEG's history at the time, uniting two major index providers.³² The combined index services were formally branded as FTSE Russell in May 2015, integrating the methodologies and product offerings of both the FTSE and Russell index series. Following the acquisition, LSEG strategically sold Frank Russell Company's asset management division, Russell Investments, in October 2015, focusing its efforts on the core index business.³¹

Key Takeaways

• FTSE Russell is a leading global provider of financial market indices and data solutions, serving as a critical component of portfolio management.
• It is a subsidiary of the London Stock Exchange Group (LSEG), formed from the merger of the FTSE Group and Frank Russell Company.
• The company maintains thousands of indices, including prominent benchmarks like the FTSE 100 and Russell 2000 Index, used by asset owners, managers, and ETF providers.
• FTSE Russell's indices are primarily capitalization-weighted, reflecting the total market value of their constituent companies.
• The Russell US Indexes undergo an annual reconstitution process, and will transition to a semi-annual schedule from 2026 to better reflect dynamic market shifts.³⁰

Formula and Calculation

FTSE Russell primarily constructs and calculates financial market indices, which themselves employ specific formulas. The most common method used by FTSE Russell for its equity indices, including the popular Russell 2000 and FTSE 100, is market capitalization weighting.²⁹ In a capitalization-weighted index, each constituent stock's influence on the index's performance is proportional to its total market value.

The general formula for a market capitalization-weighted index can be expressed as:

Where:

• ( P_i ) = Current price of stock i
• ( S_i ) = Number of outstanding shares for stock i
• ( N ) = Total number of stocks in the index
• ( D ) = Divisor

The divisor is a crucial component that ensures the index value remains consistent despite changes that do not reflect true market movements, such as stock splits, mergers, or changes in index composition (rebalancing). This approach means that companies with larger market capitalization have a greater impact on the overall index performance.

Interpreting FTSE Russell

Interpreting FTSE Russell primarily involves understanding the behavior and implications of the indices it produces. These indices serve as key benchmarks for evaluating investment performance, reflecting the collective movements of a specific segment of the equity market or other asset classes. For instance, the Russell 2000 Index is widely interpreted as a barometer for the U.S. small-cap market, providing insights into the health of smaller, domestically-focused companies. Similarly, the FTSE 100 Index is a closely watched indicator of the performance of the largest companies listed on the London Stock Exchange.²⁸

Investors and analysts use FTSE Russell indices to understand market trends, assess the performance of investment portfolios against a relevant standard, and gauge economic health. For example, a rising Russell 2000 might suggest investor confidence in the growth prospects of smaller U.S. businesses. When considering an investment strategy, understanding which FTSE Russell index is most relevant to the targeted market segment is essential for accurate performance comparison and portfolio construction.

Hypothetical Example

Consider an investor who wants exposure to the small-cap segment of the U.S. equity market. Instead of researching and buying individual small-cap stocks, they decide to invest in an exchange-traded fund (ETF) that tracks the Russell 2000 Index.

Let's say on January 1st, the Russell 2000 Index has a value of 2,000 points. The investor purchases shares in an ETF designed to replicate the performance of this index. Throughout the year, FTSE Russell, as the index provider, performs its regular reconstitution process. Suppose during the June reconstitution, several companies with growing market capitalization are added to the Russell 2000, while others are removed.²⁷ The ETF, in turn, adjusts its holdings to mirror these changes, buying newly added stocks and selling those removed, to maintain its tracking accuracy.

By December 31st, the Russell 2000 Index has risen to 2,200 points, representing a 10% gain for the year. The investor's ETF, assuming it tracks the index effectively and before fees, would also have appreciated by approximately 10%, reflecting the performance of the underlying benchmark provided by FTSE Russell. This hypothetical example illustrates how FTSE Russell's indices facilitate passive investing and allow investors to gain diversified exposure to specific market segments.

Practical Applications

FTSE Russell's indices have wide-ranging practical applications across the financial industry, serving various market participants.

• Benchmarking Investment Performance: Asset managers and institutional investors commonly use FTSE Russell indices, such as the FTSE All-World Index or the Russell 3000 Index, to measure the performance of their portfolios against a relevant standard. This allows them to assess how well their investment strategy is performing relative to the broader market or specific market segments.²⁶
• Creating Investment Products: The indices are foundational for passively managed investment vehicles like exchange-traded funds (ETFs) and index funds. Providers license FTSE Russell indices to create products that aim to replicate the index's performance, offering investors cost-effective and diversified market exposure.²⁴, ²⁵
• Asset Allocation and Portfolio Construction: Investors utilize FTSE Russell indices to guide their asset allocation decisions, determining how much capital to dedicate to different market segments (e.g., large-cap stocks, small-cap stocks, developed markets, emerging markets). The granular data provided by FTSE Russell on sectors, market capitalization ranges, and geographical exposure assists in building well-diversified portfolios.
• Derivatives and Structured Products: Financial institutions use FTSE Russell indices as underlying assets for a variety of derivatives, including futures and options, and structured products. These instruments allow for hedging, speculation, and customized risk-return profiles based on index performance.²³
• Economic Indicators: Key FTSE Russell indices, particularly the Russell 2000, are often cited by economists and media as indicators of economic health. The Russell 2000, with its focus on smaller U.S. companies, is frequently seen as a reflection of the domestic economy's strength.

The continuous development and transparent methodology employed by FTSE Russell ensure their indices remain relevant and reliable for these diverse applications.²²

Limitations and Criticisms

While FTSE Russell indices are widely used and highly regarded, like all financial tools, they have limitations, particularly concerning the prevalent market capitalization weighting methodology. One primary criticism of market capitalization-weighted indices is their inherent concentration risk.²¹ Because the weight of a company in the index is proportional to its market capitalization, a few large companies can dominate the index's performance.²⁰ This can lead to a situation where the index, and funds tracking it, become heavily exposed to potentially overvalued stocks, creating a "momentum bias."¹⁸, ¹⁹ If these large, high-growth companies underperform, it can disproportionately drag down the entire index.¹⁶, ¹⁷

For instance, an index heavily weighted toward a particular sector due to its large-cap constituents might not fully represent the broader economic landscape, potentially leading to unintended sector concentration.¹⁵ This can be a concern for investors seeking broad diversification. While index investing generally offers diversification by holding many companies, the market-cap weighting means that this diversification is not necessarily equal in terms of influence.¹⁴

Furthermore, the annual or semi-annual rebalancing processes of indices, such as the Russell US Indexes' upcoming shift to semi-annual reconstitution from 2026, can create periods of increased trading volume and price volatility as funds adjust their holdings to match the updated index composition.¹², ¹³ Critics also point out that index funds, by their nature, cannot "beat the market" since their goal is to track it. Investors seeking returns above market averages may find this passive approach limiting.¹¹

FTSE Russell vs. Market Capitalization Weighted Index

It is important to distinguish between FTSE Russell as a company and a market capitalization weighted index. FTSE Russell is a global index provider, a specific entity that designs, calculates, and licenses various financial indices. It is a subsidiary of the London Stock Exchange Group.¹⁰ Its business involves defining the rules (methodologies) for index construction, collecting data, and disseminating index values.

A market capitalization weighted index, on the other hand, is a type of financial index. It is a specific methodology for constructing an index where the weight of each component stock is determined by its total market value (share price multiplied by the number of outstanding shares). Many of the prominent indices provided by FTSE Russell, such as the Russell 2000 Index and the FTSE 100 Index, utilize this market capitalization weighting methodology.⁹

Therefore, the confusion arises because FTSE Russell produces and maintains many market capitalization weighted indices. One is the creator and distributor of the benchmark, while the other is a specific calculation method used within those benchmarks. FTSE Russell also offers other types of indices, including alternatively weighted or factor-based indices, but market capitalization weighting remains a core part of its offering.⁸

FAQs

Q1: What is the primary role of FTSE Russell?
A1: FTSE Russell's primary role is to create, calculate, and license financial market indices that serve as benchmarks for investment performance. These indices help investors and financial professionals understand market movements, build diversified portfolios, and create investment products like ETFs.

Q2: How are FTSE Russell indices used by investors?
A2: Investors use FTSE Russell indices in several ways: to benchmark their portfolio performance against a specific market segment, as the basis for passive investment vehicles such as exchange-traded funds (ETFs) and index funds, and to guide their asset allocation strategies.⁷

Q3: Does FTSE Russell offer only equity indices?
A3: No, while FTSE Russell is well-known for its equity indices like the Russell 2000 and FTSE 100, it also provides a wide range of benchmarks across various asset classes, including fixed income, real assets, and multi-asset solutions.⁶

Q4: How often are FTSE Russell indices reviewed or rebalanced?
A4: The review and rebalancing frequency varies by index. Many major equity indices, such as the Russell US Indexes, undergo an annual reconstitution process, typically in June, to ensure they accurately reflect the market.⁵ From 2026, the Russell US Indexes will transition to a semi-annual rebalancing schedule.⁴ Quarterly adjustments are also made to incorporate eligible initial public offerings (IPOs).³

Q5: What is the main criticism of market-cap weighted indices, which FTSE Russell often employs?
A5: A primary criticism of market-cap weighted indices is that they tend to concentrate heavily on a few large companies, which can lead to overexposure to potentially overvalued stocks and reduced diversification effectiveness.² This can result in a momentum bias, where the index's performance is heavily influenced by the largest constituents.¹