IPO Stocks Break Into Russell Indexes in Biggest Wave in Decade

(Bloomberg) -- Sixty-eight companies that recently debuted on the market are poised to join Russell indexes, a move that will spur purchases by funds that track the gauges.

The newcomers will be added to the Russell 1000 and 2000 indexes at the market close Friday -- with the changes coming into effect Monday -- and mark the biggest inclusion of initial public offerings since FTSE Russell began counting additions in March 2010, according to the index-maker. 

The U.S. IPO market has been booming as the economy bounces back from the Covid-19 downturn and corporations tap seemingly endless investor demand. About $600 billion has been raised in the past year, according to data compiled by Bloomberg. And the pace has picked up recently; the week after Labor Day was the busiest for IPOs in almost two months, with more than $25 billion in initial and secondary offerings since the holiday. 

“Animal spirits are alive and well,” Steven DeSanctis, U.S. mid-cap strategist at Jefferies, said by phone. “We’ve had numerous years where we had very little or no IPO activity and there’s a real thirst for new companies.”

The market newcomers, measured by the Renaissance IPO gauge, are up a combined 8% in 2021, 11 percentage points behind the S&P 500. The inclusion of 68 stocks into the Russell indexes will spur a spate of buying, as roughly $10.6 trillion are benchmarked or directly linked to FTSE Russell’s main index offerings.

“The addition will provide them exposure to potentially faster-growing, often disruptive companies while still offsetting the related risks through stakes in more established firms,” Todd Rosenbluth, head of ETF and mutual fund research at CFRA, said over email.

FTSE Russell follows a rules-based approach to rebalancing, ranking companies based on market value. Its indexes add newly public companies on a quarterly schedule and reconstitute annually. Special purpose acquisition companies, or SPACs, can only be added to the Russell indexes in an IPO reblanacing if they’ve gone public and acquired a target company all in the same quarterly period. 

The size of the latest addition is a sign of “good news,” according to Art Hogan, chief strategist at National Securities. 

“Companies don’t tend to want to come public if they don’t feel confident both in the direction of the economy and the direction of the market,” he said. “So I think that the ability for companies to come out and become public this year is a reflection of both of those things.”

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