Index Rebalancing summary?

CFA Level III
#1

Hi,

Can someone kindly summarise the rebalancing/transaction costs for the following indexes and WHY (high,low. moderate)

Price Weight

Market Cap Weight

Equal Weight.

Thanks :slight_smile:

#2

Price Weighted - Rebalancing/Portfolio transactions occur when there are stock splits and similar events so more shares would need to be bought etc. - So rebalancing would be more than Value weighted but less than Price weighted - MODERATE

Value/MC weighted - Self rebalancing. So technically 0 transaction costs - LOW

Equal Weighted - Probably the highest transaction costs due to (theoretically) constant change in price which moves the weights away from (1/N - where N is the total number of securities in the index) - HIGH

There is also the free float weighted index which also happens to be the best index for measuring performance because it improves upon the Value weighted index by adjusting for shares that are actually available to market participants. - LOW

#3

Just correcting a small typo: “So rebalancing would be more than Value weighted but less than Price Equal weighted”

#4

Thanks both.

So to summarize;

Mkt Cap = self rebalancing = low costs

Equal Weight = weight deviations = high costs

Price Weight = only on stock splits, somewhere in the middle.