Paul: [00:00:00] Welcome to the Index Ideas podcast from FTSE Russell. I'm Paul Amery, your podcast host. In this podcast, we explore index ideas that can help you address real-world investment themes and challenges. The concepts that we discuss in the podcast are not investment advice. They represent transparent, systematic approaches that may be developed into indices and made available for broad public use. So any reference to potential strategies is intended for informational and educational purposes only. In this episode, I'm delighted to welcome back Catherine Yoshimoto, who is Director of Product Management at FTSE Russell. Catherine, welcome back to Index Ideas.
Catherine: [00:00:35] Thank you so much for having me back.
Paul: [00:00:38] So in July, Catherine, you told listeners to the podcast why you think the Russell US indexes are a better benchmark for tracking the world's largest stock market, the US. Today, we're here to talk about a variant of the Russell Index family. What are the Russell style indexes, and who uses them?
Catherine: [00:00:55] The Russell style indexes are highly representative growth and value style indexes. Now these indexes measure different parts of the market, different styles, if you will, and they're constructed based on large-cap and small-cap indexes.
Paul: [00:01:11] So if you take the Russell 1000, the large-cap index, can that be split into the Russell 1000 growth and the Russell 1000 value? Is that how it works?
Catherine: [00:01:20] That's correct. So the Russell 1000 growth plus the Russell 1000 value equals the Russell 1000. Same with the Russell 2000 growth plus the Russell 2000 value. They will roll up to the Russell 2000.
Paul: [00:01:32] Just returning to the headline uses of the Russell style indexes, what volume of assets tracks them or uses them as a benchmark by comparison with the Russell Index family as a whole? How significant are these style indexes in the broader context?
Catherine: [00:01:48] The Russell style indexes have approximately $7.5 trillion benchmarked, and that's including both active and passive assets relative to the entire Russell US indexes benchmark, which is almost $12 trillion. So it's almost two-thirds of the entire Russell US indexes assets benchmarked.
Paul: [00:02:07] Okay. Great. So you mentioned that they are used both by active managers as benchmarks and also as the underlying target of index tracking funds. Were they first introduced by the active managers—was the demand initially from the active managers for this type of index?
Catherine: [00:02:23] Yes. That's correct. So, you may recall, the Russell US indexes, the 1000 and 2000, were launched in 1984. The growth and value indexes were introduced in 1987 as benchmarks because Russell's manager research group observed that there were managers that were further segmented into growth and value, first within the 1000, but also within the 2000 index. So yes, initially, and this is the same for the Russell 1000 and Russell 2000, they were introduced as better benchmarks initially for active managers. And then additional research showed that the market cap-weighted indexes could further be divided into these growth and value styles.
Paul: [00:03:07] So now I'm going to ask you to explain to listeners how we define growth and value for the purposes of the index.
Catherine: [00:03:14] Yes. How Russell defines growth and value. We use highly representative variables: book to price is used for the value portion, and there is a scoring process that combines the one value metric with the two growth metrics--the forecast medium term [earnings] growth and historical five year sales-per-share growth. So it's a combination of three highly representative variables, one value and two growth, that then is combined to create a composite value score. That translates into how the market cap is divided between the growth and value indexes within the Russell 1000.
Paul: [00:03:49] Right. Let's take the Russell 1000 index as an example. Our large cap index, you take all the 1000 stocks in the index. And you measure these three scores for all the 1000 constituents. And then you derive a composite growth or value score. Is that right?
Catherine: [00:04:07] That's correct.
Paul: [00:04:09] Okay. And then you divide the stocks into the two indices. The growth and the value.
Catherine: [00:04:15] Yes. The stocks are divided into growth and value based on approximately 50/50 market cap between the Russell 1000 growth and value stocks. Now that is based on market cap. So the counts may vary between the growth and value indexes.
Paul: [00:04:31] Right. So you may have more than 500 in one and or you know less than 500 in one, even though you're starting with the 1000 stock index.
Catherine: [00:04:39] That's correct. And actually something that some people ask about is why the count can actually be more than that of the Russell 1000. And that's because if you divide the market by market cap, there are about 30% [of stocks] in the middle that are in both the growth and value indexes. So there's no double-counting in the sense that the shares and market cap roll up into the Russell 1000. But some companies in the middle that aren't distinctly growth or value are in both indexes.
Paul: [00:05:09] Right. So do all index providers define growth and value in the same way as FTSE Russell does?
Catherine: [00:05:17] No, there are definitely differences between index providers and how they define growth and value compared to FTSE Russell. For example, one of our main competitors out there also includes a momentum metric, and that will change some of that growth and value composition. So for example for that competitor's index we saw that they moved Exxon into growth a few years ago when there was a lot of volatility with energy prices. So you will see differences between the index providers. And I published actually a paper on how index providers’ methodologies, especially when you get size and style, may differ. And the benefits of potentially sticking with one provider like the Russell US indexes methodology.
Paul: [00:06:03] Right. And that's the “Your Index Matters” paper that I think is available on the FTSE Russell website.
Catherine: [00:06:09] Yes, that's correct.
Paul: [00:06:10] And you just mentioned Catherine that some stocks can fall into both growth and value categories. So about 30% of the overall universe falls into both categories. So you just split a portion of each stock’s weight into one or the other [index]. Is that right? And I guess the split varies for individual stocks.
Catherine: [00:06:31] That's correct. So what happens with the scoring process is there is a what's called a non-linear probability algorithm that assigns a probability of growth or value to each of the stocks in the parent index, like the Russell 1000. So, based on this distribution, about 35% of market cap is growth, 35% of market cap is value. And then, around the middle, 30% is both growth and value. So probability of one equals 100% value. Probability of zero equals 100% growth. And those stocks that are assigned along the middle of the distribution—let's say they get a 50/50 probability—then 50% of their float-adjusted market cap or shares will be included in each of the growth and value indexes.
Paul: [00:07:23] So let's get some examples, just to clarify that. Now, we've obviously seen some pretty amazing performance from the large US tech stocks in the US stock market for several years. And seven stocks in particular have done very well, often referred to as the Magnificent Seven. Are those magnificent seven stocks all growth stocks?
Catherine: [00:07:45] They were until this year's reconstitution in 2025. We did see a few of the magnificent seven stocks go into partial growth and value. They are still predominantly growth, but because of their movement in book-to-price relative to the rest of the index, or, I believe one of the other growth metrics for one of the companies. So the three companies, Alphabet, Amazon, Meta are now partially growth and value. But again, still predominantly growth. And they have been for a while consistently growth. Now, if you look at the growth index, it is very technology-heavy as well as consumer discretionary, for example, because those have been driving the markets over the past several years.
Paul: [00:08:32] Right, so does that mean that the Russell 1000 growth is very concentrated? I mean, how concentrated in general are the growth and value indexes, both large- and small-cap?
Catherine: [00:08:42] We have seen concentration increase over the last several years. If you look at, let's say, the registered investment company diversification limits in the United States, where a company whose weight is 5% or more in the index cannot in aggregate be more than 50% on a quarterly basis, we have seen the Russell 1000 growth, for example, or the Russell Top 200 growth, which is the mega-cap portion of the growth index--we've seen some of those in a couple of quarters breach the RIC 5/50 limits. This occurred in March. However, it came back down in June. So it does change with the markets and we have rules in place to offset some of that concentration with these diversification/capping approaches.
Paul: [00:09:32] Right. So are you talking to large asset owners and asset managers all the time. How do clients of Russell Indexes typically combine the various size and style categories that we offer.
Catherine: [00:09:43] Well, as I alluded to in this “Your Index Matters” paper, typically our clients do look at the US equity market, the entire Russell 3000 index, let's say, as a whole. And then they divide into size and style. So large-cap, [Russell] 1000 and [Russell] 2000, small-cap and then further divide into growth and value. So often you'll see our clients, especially on the asset owner side, but probably in other segments of the market as well, that they will take the different pieces. And their goal is to understand how they are divided and how they are moving separately, but the goal is to roll back up into the Russell 3000.
Paul: [00:10:26] So people tend to look at the market through both a size and style lens.
Catherine: [00:10:31] Yes that's correct.
Paul: [00:10:33] And just talking about The Magnificent Seven and the recent performance of tech stocks in the US, have you got any stats showing the extent of the outperformance of the large-cap growth segment or the relative valuation of value stocks? Are they now very cheap by historical measures? I know we can't give investment advice but does anything catch your eye in terms of latest metrics?
Catherine: [00:10:56] I did look at the past ten calendar years performance, through 2024. Russell 1000 growth versus Russell 1000 value now, in eight out of the ten calendar years Russell 1000 growth outperformed Russell 1000 value. Now they did falter a little bit a few years ago where the Russell 1000 growth did significantly underperform the Russell 1000 value index, for example. The past decade or so has been largely driven by growth stocks. I will also mention that we do have something called the third dimension of style--the defensive and dynamic indexes. And these indexes were launched in order to better understand a third dimension. So if you think of size—large and small—as the first dimension, growth and value as the second dimension, the third dimension is defensive and dynamic. They are measuring the market based on volatility and how cyclical or defensive the markets are. So they do behave differently from the growth and value indexes. And I think when you look at our competitors’ methodologies, I think sometimes the pitfall is maybe they are reflecting kind of the dynamicness of the growth side. But our goal is to separate this dynamic dimension from growth, for example.
Paul: [00:12:17] Right. So thank you for explaining that. And defensive and dynamic is another element of the style index range that's worth having a look into. Finally, I wanted to ask you about the important changes that are taking place over the next year to the calendar for the Russell Index reconstitution, which is obviously a very big event in the US stock market. How do those changes affect the style indexes in particular?
Catherine: [00:12:42] Yes. For the semi-annual reconstitution from 2026, the Russell style indexes, for the most part, the companies in the indexes will retain their style probabilities at the second reconstitution. So June will continue to be the complete reconstitution, including all of the size and style indexes, Russell 1000, Russell 2000, growth and value. But for the semi-annual reconstitution later in the year, for the most part the style index membership will remain the same. So if the company is moving between the 1000 and 2000 indexes, they'll get a new style score, but otherwise they will stay the same at the semi-annual reconstitution.
Paul: [00:13:20] And we're doing that to manage the amount of potential turnover in the indexes?
Catherine: [00:13:26] Yes, absolutely. So the style indexes do tend to have higher turnover than the size indexes. So you know in the Russell 1000 and 2000, the turnover tends to be in single digits. In growth and value it tends to be double digits. So June will continue to be the biggest turnover event. You know last year we saw $200 billion cross at the Russell reconstitution close. The semi-annual reconstitution is anticipated to be lower. And that's because we're not doing a complete style reconstitution at the second reconstitution.
Paul: [00:13:58] Catherine. Thank you for explaining that. I have now fully understood the changes you're making. And anyone who's interested in the details can find materials on the FTSE Russell website. That brings us to the end of this episode. If you've enjoyed the conversation, then please do follow us and give us a rating or review on your podcast app of choice. If you'd like to get in touch with the show, you can do that via the email address
[email protected]. But for now from me, Paul Amery, goodbye.
