In the United States, the composition of Russell’s indexes has a significant impact. Changes in the Russell 1000, which covers the 1,000 biggest businesses listed on U.S. stock exchanges, are likely to be most noticeable.
All of Facebook’s parent companies, Meta Platforms (META), Netflix NFLX +5.03% (NFLX), Pinterest PINS, Zoom Video Communications ZM, and PayPal Holdings PYPL +5.24 percent (PYPL), will see their weightings in both growth and values following Friday’s closing, according to The Wall Street Journal. The firms in question aren’t normally associated with “value,” yet their stock prices meet FTSE Russell’s standards.
Value, growth, and/or both subindices are considered by the index giant while making this determination. One should also look at the company’s medium-term revenue growth forecasts, sales per share growth over the last five years, and the price-to-book ratio of stock while doing this analysis. A stock may be included in just one subindex, or it may be divided 90/10 between the two, depending on its relative ranking on those criteria. The company’s market capitalization determines how much weight it has in the Russell 1000 index.
The growth and value components of all of FTSE Russell’s other indexes, including Russell 2000 and Russell Microcap, are treated the same.
Once the index reorganization is complete, fund managers benchmarked against the Russell 1000 Value RLV +2.67 percent index will have additional choices to consider.
It’s shocking to see how much some of those once-steadfast growth engines have dropped off in the last year. Netflix has plummeted 63%, Zoom is down 68%, Pinterest is down 72%, and PayPal is down 74% since the beginning of the year. Because of these losses, the price-to-book ratios of these companies have fallen, increasing their value weight.
In addition, some of these businesses have recently experienced setbacks, like Netflix’s loss in subscribers and Meta and Pinterest’s poor advertising growth forecast. As a result, analysts have lowered their sales growth forecasts. After the reorganization on Friday, they now weigh both indices because of their combination.
Over the past year, the overall Russell 1000 Growth index has dropped 18 percent, while the Russell 1000 Value index has dropped 9 percent.
Growth equities, despite their recent underperformance, remain expensive compared to value companies, although not quite as expensive as they were at the pinnacle of the Covid-19 bull market. The price-to-earnings ratio of the Russell 1000 Growth index is presently 7.8 points greater than that of the Russell 1000 Value index. Last year, it had a premium of almost 15 points.
According to Jonathan Golub of Credit Suisse, the long-term average premium for growth’s P/E multiple above values is just 4.8 points. The last time the two subindexes traded at parity was during the bear market during the 2008-2009 global financial crisis.