Russell revolution: How the AI trade is reshaping benchmark risk

Index rebalances occurring in June and July of 2026 are shaping up to be among the largest passive flow events on record, driven by the combination of the SpaceX IPO,² Russell reconstitution, and the S&P Quarterly Review. The portfolio rebalancing and execution implications for active investors are equally significant. While annual Russell rebalances are always important events for active managers, this year’s stands apart due to the magnitude of the underlying risk migration occurring across size, style, momentum, and thematic exposures.

Here are some key flow estimates cited by Instinet:

• Russell Reconstitution: Approximately USD 320B of net rebalance turnover, more than double last year’s record event.³ The majority of activity is expected to be driven by style index migrations rather than adds/deletes.
• S&P Quarterly Review: Was expected at the time of publication to generate approximately USD 107B of two‑way flow, making it the fourth largest S&P rebalance in history.³
• SpaceX Inclusion: Recent methodology changes across Nasdaq, Russell, CRSP, and S&P completion indices will allow rapid inclusion of SpaceX (note, usual rules apply for the S&P 500 and inclusion will be lagged). Initial passive demand is estimated at approximately USD 20B, with cumulative passive buying potentially exceeding USD 100 billion over the subsequent 12 months as free float expands and index inclusion broadens.³

Reshaping benchmark risk

Our analysis suggests this is not merely a high‑turnover event—it is a historically significant reshaping of benchmark risk. Estimated tracking error between current and pro forma⁴ Russell benchmarks is near all‑time highs, AI‑related exposures are migrating rapidly up the capitalization spectrum and into growth benchmarks, and the resulting factor⁵ shifts are creating unusually large changes in benchmark composition. The resulting index is not simply a refreshed version of the same index; we expect there to be a meaningfully different risk profile.

Much of this is due to the power of the ongoing AI trade. Based on our analysis, AI exposure is concentrating into large- and mid‑cap growth benchmarks. In large-cap growth, this is reflected in semiconductor and software rotation, while in mid‑cap growth it is reflected most clearly in technology hardware exposure.

This migration extends beyond industry composition. It is also reflected in factor exposures. Large and mid‑cap growth benchmarks are gaining higher‑beta and stronger‑momentum characteristics. Many value and small‑ and mid‑cap benchmarks are losing AI beta exposure and, given the strong performance in the past year of some cyclical names, have diminished momentum factor exposure.

In effect, the rebalance is not just reallocating securities—it is reallocating the market’s most powerful historical performance drivers of recent times, and potentially its future risk.

Implications for active

For active managers, benchmark‑relative risk is increasingly determined not just by sector allocations but by exposure to themes, factors, and momentum regimes. To get a more holistic view of AI exposures, we measure each stock’s beta against the Goldman Sachs US Broad AI basket.⁶ The result is the purest illustration of AI‑risk migration. As shown in Figure 4, the Russell 1000 Growth Index would gain almost +1,400 bps of beta exposure and the Russell Midcap Growth Index would gain more than +1,200 bps in the highest AI beta quintile. Across the remaining benchmarks, high AI beta exposure is redistributed into lower‑beta cohorts.

For some asset classes, the implementation issues are significant. Take mid‑cap growth. Our analysis, based on pre-reconstitution and post-reconstitution Russell constituent weights, suggests benchmark turnover will be 45%, the 95^th percentile over the 31-year history of the Russell Midcap Growth Index. In this scenario, the weight of “AI beneficiaries” would increase by approximately 900 bps in the index. The technology sector weight would increase by ~1200 bps, while consumer discretionary declines by ~800 bps. Such is the extent of these changes that any strategy benchmarked to Russell Midcap Growth will instantaneously have its risk profile meaningfully altered. For instance, a passive strategy matching the pre-reconstitution index (beta of 1.0) would have a predicted beta of 0.825 against the new index after reconstitution. Maintaining existing positioning may result in materially different benchmark‑relative exposures. While making no portfolio adjustments is an option, it could leave portfolios with benchmark‑relative risk characteristics that differ meaningfully from those originally intended.

Moving to a twice‑yearly rebalance

To add to the excitement, Russell is moving from a once‑a‑year June rebalance to a twice‑a‑year rebalance. While style classifications will continue to be refreshed during the primary June reconstitution, the new November/December rebalance will allow large capitalization changes to be reflected more quickly in Russell indices.

The goal is straightforward: reduce the likelihood that dramatic market cap migrations remain trapped in inappropriate benchmarks for extended periods. Recent examples illustrate the issue clearly. Companies such as Palantir, Sandisk, and Bloom Energy experienced substantial appreciations while remaining in indices that no longer reflected their true market cap positioning. In some cases, companies that had become many times larger than their benchmark peers remained embedded in small‑ and mid‑cap indices for nearly a full year.

The challenge now for small‑ and mid‑cap managers relates to the highest market cap stocks, which are also typically the largest positions in the index, as these will likely exit the benchmark in December if they continue to move higher. If a portfolio does not own them because of a negative or even neutral view, there are just six months to be right. If the stocks collapse after they leave the index in December, that could be detrimental to portfolio performance.

Trading desk challenges

For the T. Rowe Price trading desk, these events present significant execution and liquidity‑management challenges. This rebalance season will be the busiest on record. The combination of record Russell turnover, one of the largest S&P rebalances in history, and the rapid inclusion of SpaceX across multiple index families is expected to drive unusually large closing auction imbalances, elevated volatility, and substantial shifts in passive ownership.

Successfully navigating these events will require close coordination between portfolio managers, traders, and counterparties to minimize implementation costs, source liquidity efficiently, and avoid adverse market impact. The desk employs innovative techniques such as using in‑kind transfer within mutual funds to minimize trading costs.⁷

Clearly, we are not the only investment adviser or asset manager undergoing portfolio rebalances as the industry faces balance‑sheet constraints from the sell‑side. The chart below illustrates a proxy for equity funding rates by tracking the spread above the Secured Overnight Financing Rate (SOFR) that market participants determine as the cost to fund S&P 500 exposure.

Conclusion

Index reconstitutions of this magnitude create portfolio construction and implementation challenges. Risk profiles in active funds will automatically change, providing an opportunity for thoughtful active managers to intentionally adjust their portfolios.

Risk has to be knowable, measurable, proportionate to client mandate and, above all, intentional. Highly cyclical stocks that grew 400% last year are expected to move out of value indices and into growth. But cyclical stocks (still) have cyclical earnings profiles and every low‑quality addition not held is a deliberate alpha potential opportunity and an opportunity to rotate capital into higher conviction ideas. I believe the growth benchmark is also deconcentrating modestly—differentiated views have more room to matter.

For value portfolios, the benchmark is inheriting many traditional growth names because growth has slowed and multiples have compressed. It is becoming more concentrated, losing some of the AI cyclicality and adding companies that are entering value not because they are classic cheap cyclicals, but because growth has slowed and valuation multiples have compressed. That creates a real opportunity for our research platform: we can seek to separate true mispriced value from fallen angels with dim prospects.

T. Rowe Price is actively navigating these benchmark changes—combining deep research, advanced analytics, and disciplined trading execution—to intentionally reshape portfolios and seek better long-term outcomes for our clients.