Publications
Publications
Index Rebalancing and Stock Market Composition: Do Indexes Time the Market?
By: Marco Sammon and John J. Shim
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 a -3.5% annual return and load negatively on value and profitability factors. We estimate these trades impose a 60 bps annual index-level performance drag. We explore alternative value-weighted indexes that rebalance less frequently and delay responding to compositional changes. These policies benefit investors by reducing trading costs and improving market timing, saving 40 bps annually, an order of magnitude greater than index fund fees.
Keywords
Citation
Sammon, Marco, and John J. Shim. "Index Rebalancing and Stock Market Composition: Do Indexes Time the Market?" SSRN Working Paper Series, No. 5080459, May 2025.