NEW YORK, June 25 (Reuters) - Investors are gearing up

for the final reconstitution of the benchmark indexes by FTSE

Russell on Friday, with the furious rally in artificial

intelligence (AI) related stocks over the past year expected to

leave an outsized imprint on their final shape.

The Russell Reconstitution, an event that typically results

in one of the busiest trading days of the year, will become

official after the closing bell on Friday and concludes a

multi-step process by FTSE Russell for the annual refresh of its

indexes.

This once-a-year change prompts fund managers to adjust

their portfolios to reflect the new weightings and components.

This refresh encompasses a range of the Russell indexes,

such as the Russell 1000 index of large-cap stocks and

the Russell 2000 index of small-cap names which together

make up the Russell 3000 index. In addition, there are

style indexes such as the Russell 1000 growth and Russell

2000 value indexes.

Since last year's reconstitution, the furious rally in

stocks seen as likely to benefit from AI, names such as Nvidia ( NVDA )

and Super Micro Computer ( SMCI ), is expected to

significantly impact Russell's growth and value indexes this

year.

Even with a recent slide, Nvidia ( NVDA ) shares as of Monday have

rallied about 180% from a year ago, while Super Micro has gained

more than 230%. Meta Platforms ( META ) has jumped nearly 75%

and Microsoft ( MSFT ) has climbed more than 31%.

The outperformance in growth means there will be fewer than

400 stocks in the Russell 1000 growth index, according to

Jefferies equity strategist Steven DeSanctis in New York, who

estimates the top five names will account for over 44% of the

weighting.

"All the top names keep getting a chunkier and chunkier

proportion," said DeSanctis.

In addition, the weightings in the Russell 2000 growth will

shift and DeSanctis anticipates a 4.6% decrease in tech's

weighting while health care will gain 3.4%.

The Russell 1000 growth index is expected to have about

two-thirds of its components in just technology and

communication services, said Bryant VanCronkhite, senior

portfolio manager at Allspring Global Investments in Menomonee

Falls, Wisconsin.

Meanwhile, about 45 stocks are leaving the growth index,

reducing the index to just over 390 names, compared to roughly

870 in the counterpart value index, VanCronkhite said.

"It becomes much more challenging to beat benchmarks when

you have fewer tools in the toolbox," VanCronkhite said. "If you

have a smaller number of names, you may have fewer options to

construct the ideal portfolio."

While some index providers choose to constantly refresh

their indexes to keep a fixed amount of components in them, FTSE

Russell only reconstitutes once per year, with the exception of

adding initial public offerings on a quarterly basis.

Because the reconstitution is well telegraphed every year,

it also creates additional demand for buying and selling stocks

as some investors may see the additional liquidity as an

opportunity to take advantage of any price dislocations that may

result.

At the June 2023 reconstitution, $72.7 billion and $61.7

billion in U.S. stocks traded in the closing moments of Friday

trading on the New York Stock Exchange and Nasdaq exchanges,

respectively, according to FTSE Russell.

Due to the concentration in the mega cap growth stocks such

as Nvidia ( NVDA ) this year, the typical large cap growth manager is

underweight by the top ten benchmark stocks by 16.7%, UBS senior

U.S. equity strategist Patrick Palfrey estimated in a report

late last month. Palfrey expects the top 10 company weights in

the Russell 1000 growth index to increase from 56.1% to 61.3%

after the refresh.

"In theory, the increase in concentration from the rebalance

would create buying pressure in these stocks, in practice, the

impact should be mitigated by portfolio diversification rules,"

the UBS analysts said in the report to clients, noting this

should increase tracking error among growth managers.

As of December 2023, approximately $10.5 trillion in assets

were benchmarked to the Russell U.S. indexes and $15.9 trillion

globally. While Russell has begun offering indexes that either

cap the weight of the largest market cap stocks or exclude them,

there are no plans to adjust the methodology of the indexes to

account for the market concentration.

"We're here as an index provider to reflect the market.

That's what we're hearing consistently from our clients that

they want," said Catherine Yoshimoto, Director of Product

Management for the Russell US Indexes at FTSE Russell.

"And for those who have other needs, we are figuring out

solutions that could work for them, like the capped indexes or

exclusion indexes or different segmentations of the market."