*

Palantir ( PLTR ) shift to sharply reduce weighting in mid-cap tech

*

Russell reconstitution represents giant liquidity events

*

No major rule changes by FTSE Russell this year

By Chuck Mikolajczak

NEW YORK, June 25 (Reuters) - A meteoric rally in shares

of Palantir Technologies ( PLTR ) is likely to leave its imprint

on the final reconstitution by FTSE Russell of its benchmark

indexes on Friday, when investors can expect a crush of trading

volume heading into the closing bell.

Every year, FTSE Russell reconstitutes, or refreshes, the

components in its range of indexes, such as the Russell 2000

index of small-cap stocks and Russell 1000 index

of large-cap names.

Together they make up the Russell 3000 index. There

are also style indexes such as the Russell 1000 growth

and Russell 2000 value.

Friday will be the last time the indexes are reconstituted

by FTSE Russell once per year - other than when initial public

offerings were added on a quarterly basis. The reshuffle forces

fund managers to adjust their portfolios to reflect the new

weightings and components.

"We do pay attention to it because we own a lot of companies

that are on that borderline between being in or out of the

Russell 2000," said Eric Kuby, chief investment officer at North

Star Investment Management in Chicago.

"It does seem to be a positive, obviously, for the companies

going into the index and a negative when they're coming out."

As Palantir ( PLTR ) has skyrocketed more than 460% since last year's

reconstitution, it is expected to move into the top 200

large-caps names in the Russell 1000, creating a void among the

mid cap tech sector.

Steven DeSanctis, small- and mid-cap equity strategist at

Jefferies Financial Group in New York, anticipates that will

create a drop of more than 11.1% for the technology sector in

the Russell midcap growth index.

In addition, he expects Palantir ( PLTR ) to see the most selling

pressure by dollars from passive managers for the

reconstitution.

With about $10.6 trillion benchmarked to Russell US indexes,

according to FTSE Russell, the final moments before the

reconstitution is finalized leads to heightened volume as some

investors attempt to take advantage of additional liquidity to

exploit any price dislocations.

"The fact that we now have non-traditional investors in the

small-cap space for a couple of months does provide additional

liquidity," said DeSanctis. "So if you wanted to make changes to

your portfolio, you have more of an opportunity to do so in the

reconstitution's time frame."

At last year's reconstitution, Nasdaq said nearly 2.9

billion shares, representing a record $95.257 billion, were

executed in its "Closing Cross" in 0.878 seconds across

Nasdaq-listed securities, topping the prior record of $80.898

billion in 2021. Melissa Roberts, analyst at Stephens Inc in New

York, is estimating a $150 billion net trade this year.

While FTSE Russell occasionally makes changes to its

methodology for inclusion into its indexes, this year saw little

in the way of rule changes, although Russell issued a

clarification on its domicile rule.

"Companies are starting to have dual headquarters," said

Catherine Yoshimoto, director of product management at FTSE

Russell.

"It's a more recent phenomenon... it's been happening over

the years, but it really boils down to needing a clarification

because there were enough questions around it."

Companies that are now expected to be included in the

Russell indexes through a change in their headquarters are

Brookfield Asset Management ( BAM ) and Restaurant Brands

.

Companies that are being added to the indexes usually see an

increase in demand, but that does not always translate to a rise

in prices, or what is known as the "wrong way" when the stock

falls.

Roberts notes that while the additions to the Russell 1000

are generally seeing a climb in price, the small-cap inclusions

to the Russell 2000 have declined.

"If everyone kind of has the same idea - there's this liquidity

event, I have these liquidity suppliers who are picking up

shares to facilitate the Russell trade in the market, I want to

force back my position or I want to exit a position," Roberts

said.

"If everyone starts doing that, that's kind of what crowds

the trade," she added.