Index Rebalancing

Hi fellow AFers, I have been assigned a project on 'Stock Market Index Re-balancing; but i don’t have a clue of dis. Does anyone of you have any idea about it? Any book which can help? We are supposed to work on dynamic (everyday/every week) re-balancing as against the usual frequencies of quarterly re-balancing? Any help appreciated Please chip in…

Each index is different so I would find a bunch of indices in each asset class- group them by asset class- and find the differences between the ones rebalanced more frequently versus those rebalanced annually. Might be less of a difference between the asset classes since youre only doing stock indices, but you can put that into the project as well, if its the case (no discernible difference between asset classes with regard to how often rebal occurs)

Its a fair project! I am presuming its a university project unless its an Investment Management company working on benchmarking its portfolio types weighing the pros and cons of dynamic rebalancing. I’ll be looking for widely used benchmark indices used by professional money managers in different asset classes in different region of the world. A good example would be S&P and MSCI indices. Its gonna be very hard to find a Index which is being rebalanced on a daily or even monthly basis( there must be some out there), unless you go on creating your own Index based on the same structure /criteria as available in the market, but which is rebalaced on a daily/weekly/monthly basis. Regarding the methodology of Index creation, you can go on the S&P or MSCI website, its well explained, using them as your reference you will be able to create your own index. I am pretty sure you are smart enough to dig deeper for better references.

Rebalancing frequently in an asset class index like the Russell 2000 will do you very little good. Your selling a small cap stock just to buy another, so theirs no material change in risk. If you looking at a portfolio of let’s say; 50/50 Barclays aggregate /Russell 2000, rebalancing would make a material difference bc you’d be selling either bonds or stocks in exchange for one another, which does lead to a material change in risks. Indecies like the S&P 500 are cap weighted(technically free float weighted) so they don’t need to be rebalanced. When a stocks price goes up so does it’s market cap, therefore it automatically stays imbalance. Changes only need be made when a stock is added or dropped from the index. When considering rebel frequency, transaction costs and taxes are what should really be looked at. Rebalancing daily would be to expensive to do in the real world, and the gains would be taxed at a higher rate so it’s not practical if you actually want to keep any of the money you make. I can obviously talk about this for hours, let me know if you have any questions.

When you are talking about taxes, transactions cost, lets be clear you are referring to “index funds” not an “Index”!!

Rehix Wrote: ------------------------------------------------------- > When you are talking about taxes, transactions > cost, lets be clear you are referring to “index > funds” not an “Index”!! Yeah, I think that’s obvious. You can’t actually buy an Index or Index Fund, you can only buy a mutual fund or ETF that tracks the index, and there will be some tracking error.

Nope! You can also buy an Index fund!! (:

Rehix Wrote: ------------------------------------------------------- > Nope! You can also buy an Index fund!! (: You can’t buy Standard & Poors’ S&P 500 Index Fund, S&P does not sell investment vehicles. You can buy an ishares, vangaurd, Dryfus or etc S&P 500 ETF or mutual fund that tracks the S&P 500. If you ask the Passive Management “purest” they’ll tell you that you cant buy an index fund. You buy mutual funds or ETFs.

prafulvg You are too vague about what you want to ask. Balancing portfolio and index fund are two huge topics in level III (yes, III), so you are actually ahead of your time. You may want to borrow level III books from some friends (or buy this book http://www.amazon.com/Managing-Investment-Portfolios-Dynamic-Institute/dp/0470080140/ref=sr_1_1?ie=UTF8&s=books&qid=1281185135&sr=8-1 which covers many level III topics), and then ask further questions on level III forum. Good luck

Index Funds are somewhat Mutual Fund Manufacturers’s answers to ETF. They are OPEN-ENDED ( like mutual funds and unlike ETF) that are passively managed with an MER ranging from 0.1% to 0.5%, they track an Index e.g S&P 500, MSCI EAFE, S&P Composite Index, etc… A lot of them are currency neutral using derivatives as hedging strategy. For Example the Fidelity Spartan 500 Index Fund seeks investment results that correspond to the total return (i.e., the combination of capital changes and income) of common stocks as represented by the Standard & Poor’s 500 Index. Altamira US Currency neutral Index Fund tracks the S&P 500 with derivatives used as currency hedging. SO YES YOU CAN BUY INDEX FUNDS!!!

I guess the confusion lies in the terminology … …Index and Index Funds are two different things!! Anyway my intention is to be of some help for prafulvg and not to go back and forth on something so simple to understand!!

Less frequent rebalancing = higher tracking error, lower costs

Rehix Wrote: ------------------------------------------------------- > Index Funds are somewhat Mutual Fund > Manufacturers’s answers to ETF. They are > OPEN-ENDED ( like mutual funds and unlike ETF) > that are passively managed with an MER ranging > from 0.1% to 0.5%, they track an Index e.g S&P > 500, MSCI EAFE, S&P Composite Index, etc… A lot > of them are currency neutral using derivatives as > hedging strategy. > > For Example the Fidelity Spartan 500 Index Fund > seeks investment results that correspond to the > total return (i.e., the combination of capital > changes and income) of common stocks as > represented by the Standard & Poor’s 500 Index. > > Altamira US Currency neutral Index Fund tracks the > S&P 500 with derivatives used as currency hedging. > > > SO YES YOU CAN BUY INDEX FUNDS!!! FUSEX/Spartan 500 is a mutual fund. And no, “Index Funds” are not mutual funds’ answers to ETFs. Mutual Funds that tracked indicies were around before ETFs were created. You can only buy a mutual fund or ETF that tracks an Index.