Yes, it is time to reconstitute again. Say what? Reconstitute is a buzzword (or is it a fog word?) for restructuring the stocks in the 21 Russell stock indexes.
With $365 billion invested in mutual funds that rely on the Russell indexes as investment models, mutual funds will need to buy the new additions, and sell the deletions, to "rebalance" their holdings. In plain English, "There is going to be sellin' and buyin' goin' on" before the new indexes go into effect at the market close on June 25.
This year's reconstitution of the Russell 3000 -- a market-cap-weighted index made up of the 3,000 largest U.S. companies, representing about 98% of the value of all companies in the U.S. market -- includes the addition of 34 biotechnology firms and 20 medical specialty companies. Examples of these are Keryx Biopharmaceuticals (NASDAQ:KERX) and ABIOMED (NASDAQ:ABMD).
The 323 additions are not just high-technology companies. There is everything from Motley Fool Hidden Gems Watch List stock and chicken wing purveyor Buffalo Wild Wings (NASDAQ:BWLD) to down-to-earth U.S. Concrete (NASDAQ:RMIX) to the U.S.'s largest shell egg producer, Cal-Maine (NASDAQ:CALM).
Deletions include 56 banks, regional banks, and savings and loans -- although there are also 15 such financial institutions on the additions list.
So, why should investors care that insurance company Conseco (NYSE:CNO) or discount retailer Kmart (NASDAQ:KMRT) are going into a Russell index? It gives the company visibility -- and that's about it. It is not going to bump one dime into free cash flow -- and that is what investors should be watching.
Yes, there may be short-term buying and selling in the stocks being added or deleted. But, long-term, it is those businesses building value that drive prices higher.
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Fool contributor W.D. Crotty does not own any of the stocks mentioned.
