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Has a record IPO influx given the Russell 2000 a lift?

The FTSE Russell added 62 recently listed stocks to its Russell 2000 index, including doughnut chain Krispy Kreme [DNUT], payment solution maker Flywire [FLYW] and software company Couchbase [BASE]. The new stocks started trading on 20 September, as part of its planned third-quarter index recalibration.

The recalibration is the largest number of IPO additions to the Russell 2000 index for any quarter since March 2010, when the FTSE Russell began recording the data, reports Seeking Alpha. In total, 68 stocks joined the Russell 2000 and 1000 indices.

How has the Russell 2000 index reacted since the update?  

62

Number of stocks recently added to the Russell 2000 index

  

What is the Russell 2000 index?

The Russell 2000 index is comprised of US equity market small-cap stocks. The index is the basis for many popular small-cap index funds like the iShares Russell 2000 ETF [IWM], reports Seeking Alpha. It’s a subset of the Russell 3000, representing around 10% of its total market capitalisation.

The FTSE Russell’s US indices are widely used as leading benchmarks by investment managers and institutional investors, with $9trn in assets benchmarked against them. Considering that small-cap stocks are typically more volatile and riskier than large-cap stocks, investors and traders are attracted by the potential of bigger rewards.

 

Why have so many IPOs joined the Russell 2000?

Dr Jay Ritter, a business professor at the University of Florida Warrington College of Business, explained the reason behind the record number of IPO stocks joining the Russell 2000 index and its other indices to Seeking Alpha. “The last 12 months have been by far the most active IPO market of the last 11 years, not even including SPACs (special purpose acquisition companies) ... so, it certainly makes sense that more are being added than at any time in the past decade,” he said.

“The last 12 months have been by far the most active IPO market of the last 11 years, not even including SPACs (special purpose acquisition companies) ... so, it certainly makes sense that more are being added than at any time in the past decade” - Dr Jay Ritter

 

Has a fresh influx of recent IPOs boosted the Russell 2000 index?

After opening at 2,248.07 on 20 September, the Russell 2000 index rose 0.6% to close out the week at 2,248.07 on 24 September. The index had peaked at 2,265.81 on 23 September, representing a gain of 1.46%, before slipping back. So far this year, the Russell 2000 is up 15.5%, with a one-year gain of 52.4%, as of 24 September’s close. While the S&P 500 is up 20.4% so far in 2021, it has recorded a less impressive 35% rise in the last 12 months.

Dr Ritter is bullish about the positive impact the rehabilitation will have on the Russell 2000, saying the move should boost demand for the new stocks from index ETFs and mutual funds, in particular those funds that track the Russell 2000. He did offer a note of caution though, with some institutional investors likely to have already anticipated the move by investing in shares either during the IPO process or soon after the stocks went public, which could limit the early impact on the Russell 2000.

 

How are the new Russell 2000 stocks performing so far?

Popular IPOs joining Krispy Kreme, Flywire and Couchbase in last week’s influx of IPOs to the Russell 2000 include biopharmaceutical company Aerovate Therapeutics [AVTE], Mark Wahlberg-backed gym chain F45 Training Holdings [FXLV], barbecue-grill makers Traeger [COOK] and Weber [WEBR], reports Seeking Alpha. All six of these stocks went public between 26 May, when Flywire launched its IPO, and 5 August, when Weber listed on the New York Stock Exchange.

“Krispy Kreme’s inclusion in the Russell 2000 is a meaningful milestone following the successful completion of our IPO in July and is a reflection of our ongoing growth” - Krispy Kreme CEO, Mike Tattersfield

 

It’s been a mixed bag so far for these stocks since going public, but five out of these seven stocks have gained in their first week trading on the Russell 2000. The best performer has been Flywire, with a 10.1% gain last week, followed by Traeger (+7.6%) and Weber (+5.3%). At the other end of the spectrum, Aerovate Therapeutics lost -16.5%. By far the most successful since launching its IPO, Krispy Kreme has leapt 166.2% since its 1 July listing.

There’s no doubt the freshly launched IPO companies see joining the Russell 2000 as a huge positive. Krispy Kreme CEO, Mike Tattersfield, said “Krispy Kreme’s inclusion in the Russell 2000 is a meaningful milestone following the successful completion of our IPO in July and is a reflection of our ongoing growth.” And Timothy Noyes, CEO of Aerovate Therapeutics, embodies the overriding benefit of being added to the widely followed index, saying: “We’re pleased to be included in the Russell 2000 index, as it provides a great opportunity to share our story with a broader audience of investors.”

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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