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

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  • Sammon, Marco
  • Shim, John J.

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.

Suggested Citation

  • Sammon, Marco & Shim, John J., 2026. "Index rebalancing and stock market composition: Do indexes time the market?," Journal of Financial Economics, Elsevier, vol. 177(C).
    • Handle: RePEc:eee:jfinec:v:177:y:2026:i:c:s0304405x25002375
    DOI: 10.1016/j.jfineco.2025.104229
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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