Declining market capitalizations for financial companies in the Russell 3,000 index have pushed the sector’s weighting to its lowest level in eight years, data from Russell Investments shows.

The Tacoma company, which conducted its annual reshuffling of its three major indexes Monday, said the combined market caps of bank and thrift stocks now make up 17.4% of the index, down from 22.4% a year earlier. The last time the sector’s combined market caps hit 17% was 2000.

The energy, materials, and processing and technology sectors fared the best. Energy went from 4.9% of the Russell 3,000 to 7%, materials and processing from 5.1% to 6%, and technology from 13.1% to 13.6%.

The Russell 3,000, comprising the Russell 1,000 and the Russell 2,000, tracks 98% of the publicly traded companies in the United States.

Reflecting market turmoil, the market-cap threshold for inclusion in the index dropped to $167 million, from $262 million a year earlier. Russell added 34 banks and thrifts and dropped 25. In 2007, 20 banks and thrifts were deleted from the index and four were added.

Daniel Arnold, an associate director for Sandler O’Neill & Partners LP, called the 5% drop in the financial sector’s weighting “staggering.” According to Mr. Arnold, the weighting of a particular sector usually fluctuates between one-half of 1% and 1% on an annual basis. The changes show the “absolute bloodbath that the market has taken with respect to financials,” he said.

In particular, Mr. Arnold cited the market’s pummeling of large-cap banking names like Citigroup inc., Bank of America Corp., and JPMorgan Chase & Co.; they have lost hundreds of billions of dollars in market capitalization in the past year and large regional banks tens of billions. “It doesn’t matter how many $200 million banks you add” to the Russell 3,000, he said. “That can’t make up the difference.”

Melissa Roberts, a senior vice president of quantitative research for KBW Inc.’s Keefe, Bruyette & Woods Inc., said the banking sector’s 2008 performance looks far worse than last year’s because of when Russell chose to evaluate stocks for inclusion.“The snapshot for last year’s Russell was taken at the end of May 2007, capturing things at the pinnacle of performance before things started falling apart” in August 2007, Ms. Roberts said.

Mr. Arnold said more banks were added this year because there are far more publicly traded banks and thrifts than companies from any other sector. When the cutoff level is reduced, “a lot more” bank stocks “end up falling into the range and are eligible for the Russell,” he said.

Being deleted from the Russell 3,000 will likely hurt a bank’s share price, because many institutional funds mirror the various Russell indexes and sell off those funds that have dropped out of the Russell 3,000, Ms. Roberts said. This can cause a flood of shares of a stock on to the market with far fewer buyers, pushing the stock down, she said. “But for the ones that are being added,” she said, “it’s definitely a positive for them because of the fact that you have a new set of investors that are going to be investing in the bank, and that brings up the liquidity and visibility of the name.”

No banks or thrifts rose into the Russell 1,000, but three were dropped from the 1,000 into the 2,000: Colonial BancGroup Inc. in Montgomery, Ala., East West Bancorp Inc. in Pasadena, Calif., and IndyMac Bancorp Inc., also of Pasadena. The cutoff for the 1,000 this year was $2.7 billion. Last year it was $3.2 billion.

Jeff K. Davis, an analyst with First Horizon National Corp.’s FTN Midwest Securities Corp., said it is not necessarily a bad thing for a company to be dropped from the Russell 1,000 to the 2,000, because its proportion in the 1,000 was “insignificant” and those funds that replicate the Russell 1,000 would tend to buy fewer shares. In essence, they were small fish in big ponds. But once these stocks fall into the 2,000, they become large fish in a smaller pond, he said.

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