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Point of View · 09.19.23

What the S&P 500 Index Rebalance Means for Investors and Index Managers

We analyze the additions, deletions and weighting changes of S&P 500 companies in one of the largest rebalances in years.

  • Stock Market
  • Portfolio Construction
  • Markets & Economy
Executive Summary

Key Points

What this is

We analyze the additions, deletions and weighting changes of S&P 500 companies in one of the largest quarterly rebalances in years.

Why it matters

Rebalances can affect index composition and performance of the targeted securities.

Where it's going

Index changes can alter, over time, the risk and reward profiles of passive index investments and benchmarks for active investments.

The third quarter S&P 500 Index , effective at the onset of trading on Monday, September 18, was among the largest since at least 2017 based on total estimated value of related trading. The rebalance added two companies (Blackstone, Airbnb) and removed two (Newell Brands, Lincoln National). It also adjusted the weightings on a number of companies, including Amazon, Tesla, Apple and Alphabet. We analyze how the rebalance affected index composition and performance of the targeted securities, and how rebalances impact investors and index portfolio managers.


Why are indexes rebalanced?


Index providers regularly rebalance their indexes to account for:


  • Addition or removal of companies: A company must pass several criteria related to market cap, liquidity and earnings in order to be eligible for inclusion in the S&P 500 and may be removed for failing to meet these criteria. Because constituents are selected by a committee, meeting criteria is necessary, but not sufficient for inclusion in the S&P 500.
  • Float increases or decreases: The float is the amount of total shares that are available for trading in public markets. A company’s float changes as long-term strategic shareholders change the positions they hold, affecting shares available for public trading. For example, company insiders may buy or sell shares on the open market, increasing or decreasing the float.
  • Share increases or decreases: As a company issues or , the number of shares in the index changes.


Each index provider follows its own rebalancing schedule and rules. S&P-Dow Jones, which owns the S&P 500 Index, rebalances its line of market capitalization indexes quarterly on the third Friday of March, June, September and December.

Analysis of the September S&P 500 Index Rebalance


S&P-Dow Jones announced the changes to the S&P 500 on after the market closed on September 1, effective prior to the open of trading on Monday. The addition of private equity investor Blackstone and home rental company Airbnb together represent a 0.35% weight in the index. The elimination of insurance provider Lincoln National and consumer products company Newell Brands, both migrated to the small-cap S&P 600 Index, represent a combined 0.02% weight. In terms of the top changes to companies already in the index, the weightings of Amazon and Tesla rose because of increases in their float while Apple’s weighting fell because of a share decrease. More details on key weight changes are in Exhibit 1.


As an index portfolio manager, we look at increased weightings for companies as “buys” and decreased weightings as “sells” as that is how we’ll need to trade the portfolio to align with the rebalancing. The weightings of the buys and sells must be equal to maintain the index, and in this case each side of the S&P 500 rebalance represented a 0.65% weighting in the index.


This was the second largest rebalance based on the estimated value of the related trading since December 2017, according to Instinet. The buy weightings include the 0.35% for the two new companies, 0.26% due to float increases and 0.04% for share increases. The sells included the 0.02% reduction for the elimination of the two companies, 0.11% for float decreases, 0.47% for share decreases and 0.04% for funding. Funding is when index managers sell shares in the index portfolio to fund purchases of other shares in order to match the rebalance, as the weightings increases and decreases in a rebalance are almost never identical. All weights mentioned above are based on September 1 close prices.


It’s important to note that these rebalances also change the sector composition of the index, as shown in Exhibit 2. Weightings for the consumer staples and consumer discretionary sectors increased the most, while information technology and health care fell the most.



The rebalance added Blackstone and Airbnb to the index, while weightings to Apple and Alphabet fell slightly on share decreases.

Key changes in the S&P 500 Index Rebalance chart

Source: Northern Trust Asset Management, S&P Dow-Jones, MSCI. Based on closing values as of September 1, 2023. It is not possible to invest directly in an index.

EXHIBIT 2: Sector Rebalance: Consumer Staples Gained While Tech Fell


As a result of changes to the composition of the index, sector weightings also changed, highlighted by gains in consumer staples and consumer discretionary along with declines in information technology and health care.

Consumer staples gained while tech fell

Source: Northern Trust Asset Management, S&P Dow-Jones, MSCI. Based on closing values as of September 1, 2023. It is not possible to invest directly in an index.

Performance: Buys Outpaced the Sells


Since S&P-Dow Jones announced the rebalance after the close of trading on September 1, the buys discussed above outperformed the sells by 6.8% through September 15 (see Exhibit 3). We attribute some of this difference to the rebalance, as index managers move money in and out of affected securities after the announcement. Among the buys, new additions Blackstone rose 8.9% and Airbnb rose 7.6%, with a good portion of the gains coming after the market closed on September 1.

EXHIBIT 3: Performance Went the 'Right Way'


Overall, this rebalance went the "right way" based on expected flows, with the buys (weight increases) outpeforming the sells (weight decreases) by 6.8%.

Performance went the right way

Source: Northern Trust Asset Management, S&P Dow-Jones, MSCI. From September 1, 2023 to September 15, 2023. It is not possible to invest directly in an index. 

What the Rebalance Means to Investors and Index Managers


As you can see, indexes aren’t static, and must be adjusted periodically to maintain their relevance. We think investors should stay on top of how their , in particular changes to sector weightings and additions or deletions of individual securities. Such changes may alter the profiles of all portfolios benchmarked to indexes because they are not only used for passive vehicles but as the universe from which active portfolios select as well. Understanding this interaction is important for investors as they view their overall equity holdings.


For managers of index portfolios such as us, rebalancing periods spark lively collaboration. We must rebalance every index portfolio with the aim of achieving our primary objective: Match the risk and return characteristics of the index. There is almost no room for error, as index investors have little to no tolerance for tracking error when it comes to their index investments.


To exactly match the index returns, index portfolios need to buy and sell at the closing prices on the effective date, assuming zero transaction costs. As a matter of practice, trading the entire rebalance at once may meet the primary objective but potentially cause index investors to purchase shares at temporarily inflated prices due to the significant amount of buying pressure from the rebalance. Therefore, portfolio managers and traders must work closely together to manage the potential market impact from the abnormally high volumes being traded.


For example, rather than trading a large amount of volume in a given stock entirely at the closing auction on the effective date of the rebalance, index managers may trade some of the positions early to manage liquidity. How early requires a careful balance between impact and opportunity cost, but nonetheless early trading may help avoid wealth erosion.


Like other rebalances, this one sparked a good deal of trading. Blackstone’s daily trading volume on rebalance day was over 25 times its previous 30-day average, while daily trading for Airbnb, Newell Brands and Lincoln National reached well over 10 times their averages.


We think implementation of these changes in index portfolios requires a thoughtful approach with the aim of keeping tracking error to a minimum while ensuring that the market impact and trading costs related to the rebalancing don’t erode wealth over time.

Main Point

Why Index Rebalances Matter

We think investors should stay on top of how their passive investments in indexes change over time, in particular changes to sector weightings and additions or deletions of individual securities. Such changes may alter, over time, the risk and reward profiles of passive index investments and benchmarks for active investments.

Point of View

How Equities Historically Have Performed After a Fed Pause

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