Is there a point in doing ‘pointless’ things?

Like Sisyphus, the character from Greek mythology, who continuously rolled a boulder up a steep hill.

Or the merry men who rearranged the deckchairs on the Titanic.

Or the FTSE Russell’s annual reconstitution (see image for the sequence of events) of its Russel 3000 index.

This index reconstitution is an event that’s, metaphorically speaking, both Sisyphean ─ in terms of its time loop, the inaugural Russel reconstitution first occurred exactly four decades ago in 1984; as well as Titanic-sized ─ since the Russell 3000 index tracks the stocks of the 3,000 largest companies listed on the U.S. stock market and includes about 98% of all American stocks.

Index providers typically have two key duties: Rebalancing and Reconstituting.

The former poses no problem, since most US indices are value-weighted (except the pointless Dow Jones which has remained price-weighted since inception, but that’s a story for another day on ‘dumb-indices that refuse to go away’), it’s the latter that increases complexity.

You see, an index like the SPX 500 is rebalanced every quarter, but companies can be added and deleted (which is the Index Reconstitution process) at any point in time.

What makes the Russell 3000 index reconstitution exercise complex is it’s only done once a year!

Considering the sheer breadth of the index, it’s tough for Russell 3000 stocks to be buffered out of the index on-the-go or even for the index to be reconstituted at quarterly frequencies.

There is some market chatter that FTSE Russel is considering changing the reconstitution frequency to semi-annual (to reduce the trading pressure on the markets considering the recon trade now sizes up to at least $100 billion)

But even a semi-annual recon exercise only adds more shelf space to the pointlessness of the entire exercise since the Russell 3000 ─ while admittedly being more objective than the SPX ─ also ranks stocks based on Market Cap, effectively creating an index with a long tail that tapers down to include stocks with a minimum market cap of $30 million.

Does that effectively represent a broad swathe of the US market?

Those series of revolving doors at each break in market cap sizes between the Russel 1000, 2000 and 3000 did have some Hedge Funds interested in the spoils of Index Arbitrage trades for a while but most of those Hedge Funds have now exited this strategy.

The superfluous breadth of the Russel 3000 appears most ungainly when viewed against the MSCI World Index which captures large and mid-cap representation across 23 DM countries.

MSCI World is a world index, yes.

And it has 1,465 constituents.