Index rebalancing and stock market composition: Do indexes time the market?
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.
Fields of Study & Subjects
Financial Markets and Investment Strategies
Auditing
Earnings Management
Governance
Corporate Finance and Governance
Publication details
- Journal / source
- Journal of Financial Economics
- Publisher
- Elsevier BV
- Volume
- 177
- Pages
- 104229–104229
- Publication date
- 7 January 2026
- Language
- EN