When stocks go into or out of stock market indexes, it can drive wild trading action—even in the market’s largest names. Think
when its shares were added to the
That raises the question what will happen to
shares (ticker: GME) when Russell revamps its indexes in June, a process that starts in May. This year’s reconstitution could be big news for GameStop investors.
Tesla was already the world’s most valuable auto maker when the announcement was made. The company’s market capitalization gained roughly $200 billion between Nov. 17 and Dec. 21. That amount is almost equal to the total market value of the second most-valuable auto maker in the world,
Tesla stock was $650 when it went into the S&P 500. Since its addition, Tesla stock has traded above $900 a share and traded as low as $614. It has been a wild ride for one of the largest, most valuable U.S. stocks.
GameStop shares are nowhere near recent levels. The stock recently became embroiled in a social-media meme-fueled short squeeze. Shares traded as high as $483 in January.
That rise hurt many small-cap active portfolio mangers who benchmark their performance against the Russell 2000 small-cap index. Many active managers are underweight GameStop shares, meaning they own less of the stock than GameStop represents in the Russell. As a result, they underperformed passive indexes that seek only to match the benchmark as GameStop shares soared.
Active managers got some of that underperformance back in February. Shares traded as low as $39 a share this month before bouncing back in recent days. “Volatility picked up again, but this time not driven by a short squeeze…. This volatility is a growing risk to small-cap active managers,” wrote Wells Fargo analyst Christopher Harvey in a Friday note. “Longer term, there is a growing fear of locking in stock-specific underperformance if a high-flyer reversion does not occur before June’s Russell re-balance.”
GameStop is the highflier he’s referring to. The problem for small-cap managers is GameStop might end up graduating out of the Russell 2000 and into the large-cap Russell 1000, locking in the underperformance for those managers.
It appears Harvey suspects some of the GameStop volatility isn’t due to a short squeeze or aggressive trading, but partly a function of small-cap portfolio managers weighing their options. Managers trying to recapture performance before reconstitution could be driving the stock. That means there could be some more wild trading between now and Russell index reconstitution. The selling from Russell 2000 funds will likely be matched by buying from Russell 1000 funds.
FTSE Russell, the entity that manages the indexes, wasn’t immediately available to comment on reconstitution or the amount of money indexed to the 1000 and 2000 benchmarks.
Traders can expect volatility in GameStop to persist. That’s good news for them. It’s bad news for investors who find this level of volatility nauseating.
Write to Al Root at firstname.lastname@example.org