Index rebalancing and stock market composition: Do indexes time the market?

Value-weighted indexes must rebalance in response to stock market composition changes, e.g., issuance, buybacks, and IPOs. In doing so, existing index funds implicitly engage in market timing. Index funds’ long-short rebalancing portfolios have an annualized return of 4.61% and load negatively on value and profitability factors. We estimate these trades impose a 46–69 bps annual index-level performance drag. We explore alternative value-weighted indexes that rebalance less and delay responding to compositional changes. Despite still closely tracking the market, these indexes improve market timing and lower trading costs, saving 50 bps annually, an order of magnitude greater than index fund fees.

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Publication Details

Journal
Journal of Financial Economics
Published
2026-01-07
DOI
https://doi.org/10.1016/j.jfineco.2025.104229
Citations
1
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
59.40
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article

Index rebalancing and stock market composition: Do indexes time the market?

Marco Sammon, John J. Shim
1 citations
Journal of Financial Economics
Financial Markets and Investment Strategies
59.40
article

Index rebalancing and stock market composition: Do indexes time the market?

Marco Sammon, John J. Shim
article en
1 citations

Abstract

Value-weighted indexes must rebalance in response to stock market composition changes, e.g., issuance, buybacks, and IPOs. In doing so, existing index funds implicitly engage in market timing. Index funds’ long-short rebalancing portfolios have an annualized return of 4.61% and load negatively on value and profitability factors. We estimate these trades impose a 46–69 bps annual index-level performance drag. We explore alternative value-weighted indexes that rebalance less and delay responding to compositional changes. Despite still closely tracking the market, these indexes improve market timing and lower trading costs, saving 50 bps annually, an order of magnitude greater than index fund fees.

Journal of Financial EconomicsVol. 177
University of Notre Dame (US), Harvard University (US)
Openalex Percentile: Top 1%
Financial Markets and Investment Strategies
59.40
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