The biggest trading day for small caps is approaching: How should investors prepare?

On June 30, FTSE Russell will complete the annual rebalancing of its main small-cap index, the Russell 2000,  as well as the large-cap Russell 1000 and the broad-market Russell 3000. Thus, a new set of more than 3,000 stocks is in store. With the day of the rebalancing usually the highest-trading volume day of the year, what should investors know?

Each year, about 20% of the companies in the Russell 2000 are replaced, explains Georgy Timoshin, an analyst at Freedom Finance Global.

The rebalancing begins in late April, when index provider FTSE Russell ranks companies by market capitalization. The selected companies enter the Russell 3000, a broader index comprising about 3,000 publicly traded U.S. stocks. According to Noble Capital Markets, this is roughly 98% of the market.

Then, the companies are split into subindexes: the Russell 1000 for the largest firms by market capitalization, the Russell 2000 for mid- and small-cap stocks, as well as the Russell Microcap. FTSE Russell often applies a “buffer zone,” as explained in a Nasdaq index explainer. This is a range that prevents small fluctuations in market capitalization from immediately knocking a company into or out of the index. 

Rebalancing is done by other index providers as well. Take S&P Global, which runs the S&P 500 (large caps) and S&P SmallCap 600 (small- and mid-caps). To be included in them, a company must have a free float of at least 10%. However, S&P indexes are updated as necessary, such as after mergers or acquisitions. S&P also applies stricter fundamentals requirements, Timoshin notes. For example, to be eligible for inclusion, U.S. companies must report a profit in the most recent quarter and have a cumulative profit over the last four quarters.

Being added to an index is a milestone for companies, Timoshin explains. He highlights three key reasons:

Understanding the methodology and timeline of index rebalancing is crucial, says Timoshin.

The Russell rebalancing began on April 30, Noble notes. On Friday, May 23, FTSE Russell will publish preliminary lists of additions and deletions. Changes will take effect after the market close on June 27, and the updated indexes will begin trading on June 30.

This is the standard procedure. However, companies that go public can be added to the Russell index quarterly. In contrast, S&P requires a company to trade for at least 12 full months post-IPO, and the Nasdaq 100 requires three full calendar months.

This year, Russell’s index construction rules changed.

Since March, a new capping methodology has been introduced for subindexes, such as the Russell 2000 Growth and Value indexes, Timoshin notes. Under the new rules, no single stock can account for more than 22.5% of the index. Additionally, the combined weight of all stocks exceeding 4.5% each may not surpass 45% of the index. In essence, this limits the influence of heavyweight names.

Starting in 2026, rebalancing will occur every six months instead of once a year — a change FTSE Russell says is based on “data analysis and follows a market consultation undertaken in response to the recent evolution of market dynamics.”

Note that index changes take effect after the market closes, meaning they are reflected on the next trading day.

At that point, all index-tracking funds need to buy and sell the same stocks in the same quantities. As a result, the days before rebalancing see “unusually large liquidity points,” with a sharp increase in trading volumes, as Nasdaq points out. 

Nasdaq says trading volumes on rebalancing days are typically six times higher than usual. Moreover, around 40% of all market-on-close buy or sell orders come from index funds versus about 5% on normal days.

Investors can watch for likely index additions and removals themselves and buy or sell shares accordingly, Timoshin notes. This can be part of a broader active trading approach.

The “right” timing depends on the investor and their strategy, he says. Experienced investors focused on small caps may act proactively, buying potential index candidates if they believe inclusion is likely.

Some investors buy shares right after the preliminary lists of index changes are published — typically a month ahead of the final rebalancing, Timoshin adds.

Four of the six top small-cap ETFs recommended on May 13 by Morningstar to buy before a small-cap “revival” are passive, tracking indexes. Morningstar contributor Susan Dziubinski says now is the best time to invest in the segment: Small caps remain the most undervalued part of the market, and although Fed easing and charged economic growth are not expected in the near term, small caps could start to pay off “later this year or [in] early 2026.”

The four recommended ETFs include: