Russell 2,000 to Get More Tech Stocks

Frank Russell Co.’s Russell 2,000 index, a key gauge of small U.S. stocks, looks like it will be getting an infusion of technology shares at its annual rebalancing June 30--thanks to the bear market in tech.

“We can say two things: First, there will certainly be a lot more tech names in the Russell 2,000,” said Brad Lawson, a senior research analyst at Frank Russell Co., which puts together the index. “And two, because there is such a difference in tech stocks’ performance since [last year’s] reconstitution, the magnitude will be much larger than history.”

Many tech stocks have lost more than half their value in the last year. Because the Russell 2,000 is rebalanced each year to include the smallest 2,000 of a universe of 3,000 U.S. stocks, it automatically will become home for many beaten-down tech issues.

By contrast, the index currently has only 366 tech companies representing a little more than 10% of its total value. That low tech weighting shielded the Russell 2,000 last year: It fell just 3% for the year.

When the Russell 2000 is rebalanced, index managers who oversee some $25 billion in assets will have to sell and buy stocks to mimic the index.

“Last June, when the tech weighting was dramatically reduced, there was a lot of trading in stocks coming in and out of the index,” said Joseph Gatz, a portfolio manager at Loomis Sayles Small Cap Value Fund. “That creates opportunities for us to buy and sell stocks that move on non-fundamentals.”

Adding tech companies might help the index’s performance in the next year--if tech begins to rebound significantly.

Merrill Lynch & Co. is forecasting the technology component will be rebalanced to an 18.3% share of the index, becoming the largest sector in the Russell 2,000.