Much like the annual event of spring cleaning, Russell Investments is refiguring the Russell 2000 and with it comes many implications.

In an effort to maintain true representation of global equity markets and ensure changes in the market are accurately reflected, Russell annually rebalances all of its indices, including the small-cap Russell 2000 index.

As a result of the reconstitution, the financial and energy sectors are likely to see the most action, according to Steve Wood, senior portfolio strategist for Russell Investments.

“If you’re looking at the market-cap issues, the performance of financials and energy are going to be the two biggest dynamics — energy having done well, financials having done poorly,” Wood said in an interview with SmallCapInvestor.com. “You’re going to see a lot of transition and I think that will account for a significant portion of the migration in and out of [the index]; energy coming to the market cap or moving out of the 2000 whereas financials [will] far further down the ladder.”

Wood says energy will probably graduate to the Russell 1000 from the Russell 2000 (the large cap index), while consumer technology, financials and transportation are the most likely sectors from which companies will be added to the small-cap index.

JP Morgan purports that consumer and financial stocks will comprise 35.81% of the Russell 2000, compared with 34.6% both sectors currently comprise. The investment bank expects 275 additions this year, compared with 175 deletions and forecasts the upper limit for market capitalization will be capped at $165 million. Last year the cut off was $260 million.

Jefferies & Co. estimates that 259 names will be added to the Russell 2000, while 157 names will be subtracted. Of the $4 billion in trade flow that Jefferies expects, the bank says $850 million will stem from materials, while $765 million will flow from technology and $730 million will come from health care.

Certainly the tumultuous state of the economy has been a major determinate of the expected outcome of the Russell reconstitution.

“If you figure the economy was sailing along, that would probably have been a better environment for small-cap stocks. Assuming the credit markets were still vibrant and not disabled as they currently are, that would create more consumer headwinds for stocks that are disproportionately exposed to the U.S. economy,” said Wood.

Money managers have been hard at work preparing for the reconstitution, developing strategies that take advantage of those movements. Jefferies purports that Russell Index managers will need to trade approximately $25 billion to rebalance their Russell portfolios, a decline of $53 billion from last year’s reconfiguration.

Wood says indexers will find playing the reconstitution challenging, while asset managers who use the Russell 2000 as a benchmark might be better positioned.

“If you’ve done a more proactive job of actively managing assets — trying to pick winners, losers, well-run companies — that are likely to do better in this specific environment and that understand their financials, you could make the argument that they have a more favorable environment than just the indexers. If a lot of financials fall down into the 2000 and energy moves up, then you’d expect after the recon that you could have more movement than you’ve had over the last number of years,” said Wood.

Volatility in individual names is also expected to ratchet higher, given the dichotomy between the robust first months of 2007 and the challenging environment since October.

“I think you’re going to get higher percentage movers than you’d see otherwise,” Wood said. “The percentage increases will be more dramatic.”

The official reconstitution of the Russell Indexes will take place after the market close on June 27, 2008, but Monday will bring early assessments of additions and deletions to the Russell 2000.