SEM217: Vitali Kalesnik, Research Affiliates

Tuesday, February 8th @ 11:00-12:30 PM (ONLINE)

Rebalancing: The Achilles’ Heel of Conventional Indexing

Vitali Kalesnik, Research Affiliates

Abstract: Traditional passive indexes systematically buy companies at high average valuations and sell at low valuations, causing a drag to the index performance. Taking the S&P 500 as an example, in a year prior to the announcement of the index rebalancing and subsequently until the actual rebalancing occurs, a typical addition outperforms a typical deletion by about 83%. In the year after the rebalancing, this pattern mean-reverts, where the addition loses relative to the deletion by about 23%. Simple rules such as delaying rebalancing by a year, or using stale capitalization weights, or using fundamental weights to select the securities into the index, and using banding to limit turnover, results in about 15-27 bps return advantage with about 20% lower turnover. Advantages outside the US are even larger.

Recording | Slides