Index reconstitution

Index reconstitution is the periodic process of adding new companies to an index and removing companies that no longer qualify, changing the index's actual membership rather than just adjusting the weights of companies already in it.

The Russell indexes hold one of the best known reconstitutions, now twice a year in June and December, when FTSE Russell re-ranks nearly the entire US stock market by size and reassigns companies across the Russell 1000, Russell 2000, and other size-based indexes based purely on where they now rank. A company that grew enough since the last review can graduate from a small-cap index to a large-cap one, or shrink enough to move the other way.

Because every fund tracking an index has to buy newly added companies and sell removed ones on the same day, reconstitution day produces some of the heaviest trading volume of the year in a single day for the stocks affected, often with limited connection to anything happening in the underlying businesses themselves.