2025 FTSE Russell^® US Equity Index Reconstitution: Key Insights and Impacts

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All three names remain large holdings within the Russell 1000^® Growth Index.

_{Source: Factset}

Importantly, the benchmark changes affect each index differently. For example, the Russell 1000^® Growth Index is more concentrated and has a higher weighted average market capitalization as compared to the Russell 1000^® Value Index. Therefore, the stock weight changes of the upcoming reconstitution affect the two benchmarks differently. Amazon, Alphabet and Meta are coming into the Value Index with a combined 5.37% weight, but their combined weight in the Russell 1000^® Growth Index is only declining by 3.41%. This means that the overall level of concentration and exposure to mega-cap technology names in the Russell 1000^® Growth Index will remain relatively constant, although the underlying security weights are shifting.

These benchmark changes occur annually and are based on what happened during the prior year. At MFS, we have always constructed portfolios based on bottom-up, fundamental analysis using a long-term view of what we think will happen over the next five to ten years. We look at both absolute and relative risks and make decisions based on what we believe is in the best long-term interest of our clients. We will continue to thoughtfully assess the rapidly changing landscape and ensure that the MFS Growth and Value portfolios remain reflective of those views.

Value Team Perspective 

We don’t label companies as growth companies or value companies. We have a time-tested, consistent investment process that guides our assessment of investment opportunities and which companies to include in this portfolio. Investing in companies that have long-term, durable and resilient business franchises that trade at attractive valuations has been a key factor in generating consistent, strong, risk-adjusted returns for clients through time. Critically, we have also always maintained a robust focus on downside risk management. While our foundational investment philosophy has remained unchanged for thirty years, this does not mean that our investable universe is also unchanged. Maintaining a disciplined investment approach over time is not equivalent to having an unchanged investment opportunity set, however. We are constantly evaluating how the evolving external landscape affects companies and the resulting impact this necessarily has on our investable universe going forward. We maintain an open-minded, curious approach to our assessment of companies and are not dogmatic in our views. 

Considering the changes from the 2025 index reconstitution, it’s natural for some to feel a sense of apprehension given the impact of the 2022-2023 rebalance. In the 2022 FTSE Russell^® index reconstitution, Meta came into the value index as the sixth largest position with an index weight of 165 basis points. Though its shares underperformed the market coming into June 2022, in early 2023, the market’s enthusiasm for generative artificial intelligence began to accelerate meaningfully, and Meta’s share price increased by nearly 140% during the first half of 2023. Not including it in the MFS Value Fund therefore presented significant relative performance headwinds for us in 2023. The reason we did not own Meta at the time was based not on valuation — its shares were certainly not expensive in 2022 — but rather due to concerns about the long-term durability of its business in the face of likely regulatory changes, significant shifts in the personal digital advertising model and a major corporate pivot toward the Metaverse (including changing its name to Meta), all of which could have resulted in a wide range of potential outcomes for the company. Over the last several years, many of these issues have been resolved favorably, and the company has evolved its positioning, which is reflected in its valuation. 

Today, there are important differences from the 2022 landscape that provide some comfort that it is highly unlikely we will see a repeat of the magnitude of performance swings we saw in the first half of 2023. The names coming into the Russell 1000^® Value Index today have a vastly different relative performance history over the prior 6 to 12 months, as well as a much higher valuation at their entry points. This doesn’t mean that Amazon, Alphabet and Meta aren’t worthy of consideration. We have done work on these stocks prior to this period and will continue to assess their long-term durability, the range of potential outcomes moving forward and how valuation does or doesn’t provide an appropriate level of downside risk management to fit into the MFS Value Fund.

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Growth Team Perspective 

This year’s rebalance is essentially shuffling the weight of the Magnificent Seven stocks. While the aggregate weight of the Magnificent Seven is not changing much, the composition of weights is shifting. In our opinion, the framework of Magnificent 7 is very backward looking, reflecting the past, highly correlated returns. The table below illustrates the old and new weights of the large benchmark weights. Even though Amazon, Meta and Alphabet will become significant weights in the Russell 1000^® Value Index, their stocks are still in the top five weights of the growth index and continue to account for a significant portion of the Russell 1000^® Growth Index. Alphabet has been displaced as the 6th largest weight by Broadcom, which is now 4.3% of the index. Importantly, we continue to see diverging trends in the fundamentals of these companies, which are driving increased dispersion in returns. Moving forward, we would not expect returns of these top weights to be as correlated as the past three years.

Megacap Stocks – Change in Weight 

_{Source: Factset}

Proposed changes in sector weights are driven by shifts within mega-cap names. A few other notable changes include Broadcom increasing to 4.3% topping Tesla and Alphabet. Others include, GE Aerospace increasing to -72 basis points, and GE Vernova increasing to 48 basis points. These and other sector weight changes are detailed below. 

_{Note: Top company name shifts shown.}

Changes in benchmark weight will impact active weights in the portfolio. Ideally, we want to maintain our active positions relative to the index. 

Russell Midcap^® Growth – Some Relief from Growing Index Concentration 

We will see some relief from the growing index concentration of the Russell Midcap^® Growth Index. The top 10 weights in the index will decline from 24.6% to 20.4% of the index. This change is largely due to Palantir and AppLovin moving out of the index.

At -peak $338 billion market cap, Palantir was as high as 9% of the index and at peak $140 billion market cap, AppLovin was about 3.3%. When Russell calculated the initial rebalance on April 30th the mid/large market cap cut-off was estimated to be $58.2 billion. However, the market has rallied significantly since then, and the new largest market cap in the Russell Midcap Growth index is Coinbase at $90 billion. (Russell^® determines the market cap cutoff by the 201st largest market cap company in the universe, which is why it has been creeping higher each year.) On April 30, when Coinbase’s inclusion in the index was first determined, its market capitalization stood at $51.6 billion. Over the following two months, the stock rallied by more than 70%, pushing its market capitalization up to $90 billion.

The largest weight in the index is now Royal Caribbean, with a weight of 2.6%. As of June 30, its market capitalization was approximately $84 billion. Back on April 30, when Russell determined the new weights for the index, Royal Caribbean’s market capitalization stood at $58.3 billion. Since then, the stock has rallied by 45%. Notably, 7 of the top 10 weights in the index now have a market capitalization exceeding $60 billion. This highlights an ongoing trend of significant market cap creep within the midcap universe. 

We will also see significant changes to sector weights. Information technology will decline by more than 1100 basis points, primarily due to the exit of Palantir and AppLovin. Consumer discretionary will increase by about 850 basis points, which includes a 500 basis point increase in the travel and leisure industry, including Royal Caribbean and Flutter Entertainment. The weight of industrials is increasing primarily due to the large increase in Howmet Aerospace. Details of these sector weight changes are illustrated below.  

_{Note: Top company name shifts shown.}

After the index rebalance, our strategy will shift from having a large underweight position in information technology to a slight overweight. The team is comfortable with this positioning. In consumer discretionary, our positioning will move from approximately 200 basis points underweight to 1000 basis points underweight. This is outside of the normal risk control band of roughly 500 basis points and will most likely be adjusted. The team views Palantir’s impact on the index as a unique, “unicorn”-type situation that is unlikely to repeat in the future, given the upcoming shift to semi-annual market cap rebalancing.

Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell^® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The Russell 1000^® Growth Index is rebalanced on an annual basis. The Russell 1000^® Growth Index is a trademark/service mark of the Frank Russell Company, Russell^® is a trademark of the Frank Russell Company. This year’s rebalance was finalized after market close on 27-Jun-2025 and took effect on 30-Jun-2025.

The Global Industry Classification Standard (GICS^® ) was developed by and/or is the exclusive property of MSCI, Inc. and S&P Global Market Intelligence Inc. (“S&P Global Market Intelligence”). GICS is a service mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS. MFS has applied its own internal sector/industry classification methodology for equity securities and non-equity securities that are unclassified by GICS.

The views expressed herein are those of MFS. These views are subject to change at any time and should not be construed as the Advisor's investment advice, as securities reccomendations, or as an indication of trading intent on behalf of MFS.

Past performance is no guarantee of future results. No forecasts can be guaranteed.