What happens when value turns into growth? What happens when value turns into growth? http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\cross-roads-small.jpg July 29 2026 July 30 2026

What happens when value turns into growth?

There were some surprising changes with the recent index rebalance
Published July 30 2026
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At the start of 2026, Warren Buffett’s Berkshire Hathaway, arguably the standard-bearer for value investing, was the largest company in the Russell 1000 Value Index (Ru1000V). That is, until Micron Technology (MU) surpassed it last quarter. And then…MU disappeared entirely from the Ru1000V at the end of June. It’s for reasons like that the mid-year index reconstitution by index provider FTSE Russell is closely watched by investors and industry watchers. 

This rebalancing affects passive indexers and active managers alike, and it triggers a large and mechanical reallocation of global capital. Because of this, it is important for investors who choose to invest in a particular style or set of styles to understand what the rules are regarding the construction of their style’s benchmarks. 

Index methodology  

While this annual reconstitution can produce some interesting outcomes, the process is rules-based and largely transparent. The size-based rules are largely self-explanatory — Russell 1000 Index: approximately 1000 largest companies; Russell 2000 Index: approximately the next 2000 largest; Russell 3000 Index: Russell 1000 plus Russell 2000. 

Less intuitive, however, is how the index assigns style classifications to individual stocks. It’s not uncommon, for instance, for a company to be represented in both the growth and value indexes. 

Russell indexes classify constituents along a growth/value spectrum using quantitative style scores derived from company characteristics, designed to reflect the traditional growth/value distinction used by many investors. Russell looks to three metrics to determine that classification: book/price, forward two-year earnings growth and five-year historical sales-per-share growth. These inputs result in a composite score that determines a stock’s weighting across value and growth, rather than assigning it strictly to one style category. This creates an index construction idiosyncrasy that many investors may not be aware of — the style indexes are not mutually exclusive.

Movement among the giants

One other wrinkle in the classifications process is how quickly things can shift – and this was certainly the case this year. Again, it’s helpful to understand what’s going on behind the scenes.

There are typically several hundred stocks classified across value and growth in the Russell 1000, though their exposures may tilt in one direction or another. AI-driven stocks like MU and SanDisk were fully removed from the Ru1000V, in favor of the Russell 1000 Growth Index (Ru1000G), which is a major shakeup given how well those companies had performed. In addition, the Magnificent 7 (Mag 7) stocks also shuffled a bit: Alphabet (Google) will be fully removed from Ru1000V into Ru1000G. At the same time, Apple and Microsoft will become more balanced “hybrid” names in both. Amazon, still in both, is now much more heavily weighted toward value.

Moving forward, MU has been replaced atop the Ru1000V index with Amazon, Apple and Microsoft, three of the Mag 7. Overall, the Mag 7 weighting within the Ru1000V increased from approximately 6% to 16% with the rebalance. 

Indexes and portfolio construction

We are aware of the various criticisms leveled against index construction methodology. For instance, it seems preferable for a company with strong share price performance to transition gradually from value to growth as its price rises, rather than undergo an abrupt shift on the last Friday in June.

Still, indexes, in our opinion, aren’t going away and they provide an essential element to the portfolio construction process for us and for many investors. They can help guide portfolio diversification, provide a standard of risk and be an objective measure of portfolio performance.

The Ru1000V index contains close to 870 stocks with diverse characteristics and company types that are unified by their inclusion within the style index. If an investment manager claims to take a value approach to investing, it may be appropriate to compare their portfolio’s outcome relative to the broad market indexes, such as the S&P 500 or the Russell 1000. But it may also be useful to evaluate whether their approach to value investing outperforms a basic rules-based approach to finding “cheap” stocks. Those simple rules may lead to strange outcomes at times, like the largest constituent vanishing from the index overnight. Yet, no investor is being forced to invest in the passive products that track these indexes (although hundreds of billions of dollars do). In our view, these quirky outcomes are not a bug but a chance for active managers to demonstrate their value.

To read more about MDT see How we seek to enhance our alpha model 

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Stocks are subject to risks and fluctuate in value.

Indexes are unmanaged and cannot be invested in directly.

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Russell 1000® Growth Index: Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made directly in an index.

Russell 1000® Value Index: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

Russell 1000® Index: Measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Growth stocks tend to have higher valuations and thus are typically more volatile than value stocks. Growth stocks also may not pay dividends or may pay lower dividends than value stocks.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

Russell 3000® Index: Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. Investments cannot be made directly in an index.

Diversification does not assure a profit nor protect against loss.

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