Every quarter, S&P-Dow Jones rebalances its flagship market-capitalization index series, including the S&P 500 Index. Changes to the index related to the rebalance may appear small but they drive significant trade volumes in the market from the announcement date (Sept. 6, 2024, by S&P-Dow Jones) and leading up to the effective date of the changes, which is the market close on Sept. 20, 2024. According to S&P estimates, about $16 trillion in assets are benchmarked to the flagship S&P 500, with a large portion of that in passively managed assets.¹ All investors should be aware of these changes but they are particularly important for index managers, who are tasked with tracking indexes with a high level of precision.

Rebalance periods at Northern Trust, one of the world’s leading managers of index assets,² demand a significant amount of collaboration across our investment team. For all our index portfolios benchmarked to the S&P indexes, we must carefully manage the rebalances to ensure we achieve our primary objective of matching the risk and return characteristics of the benchmark.

Key Changes: Technology Additions and Apple's Float Increase

This quarter’s S&P 500 rebalance included three additions, two of which are in the information technology sector (see Exhibit 1). Computer hardware maker Dell, and Palantir Technologies (a software firm), entered the index with a weighting of 0.07% and 0.15% respectively. The third addition was property and casualty insurance company, Erie Indemnity, with a weighting of 0.03%. Two companies dropped down from the index into the S&P Midcap 400 – American Airlines and biotechnology company, Bio-Rad Laboratories. Etsy was also removed from the leading index and demoted to the S&P Small Cap 600.

S&P used this quarter’s rebalance to incorporate its annual float changes. The S&P 500 index is a float-adjusted index, meaning the share count used to calculate the index reflects only those shares available to investors rather than a company’s total outstanding shares. Float adjustments exclude shares that are held by other publicly-traded companies, governments, or other types of strategic shareholders.

In this review, the S&P stock universe is assessed and updated to reflect the most current ownership data. As a result, one of the largest share changes was an increase in the float of Apple, stemming from the disclosure of stock sales from its shareholder Berkshire Hathaway this year. This increase is notable as it will result in a weight increase of 0.33%, taking its weight in the index to over 7% and generating an estimated buy of $25 billion in net traded value across the market.³

Sector Impact: Largest Move From Information Technology

With the additions, deletions, and notable share changes that took effect, the sector composition of the index did slightly change, as shown in Exhibit 2. Clearly leading the change was the rise in the information technology sector, while healthcare and communication services dropped the most.

Dell and Palantir, along with the float increases of Apple and to a lessor degree, Broadcom, all contributed to the increase in weight for the information technology sector despite some other notable stocks, including Microsoft and Nvidia, modestly dropping their weights in the index by 0.04% each. The information technology sector now makes up over 31.5% of the S&P 500 index inclusive of when these changes are accounted for. The largest sector decline was healthcare, with the removal of Bio-Rad and a share float decrease in Eli Lilly contributing to the dip in the sector.

Performance Analysis: Adds Outperform Deletes

The performance of the additions got off to a hot start, with the standout performer being Palantir, which popped 14% on the first trading day post announcement. Palantir and Dell saw consistent rallies over the entire rebalance period and buoyed the strong positive performance spread between the additions and deletions shown in Exhibit 3. This rebalance period included a broader risk rally in growth, higher beta, and technology stocks, with the technology sector up 8.4% during this window and on Sept. 19, the S&P 500 index reached a new record high post the Federal Reserve’s announcement of a 0.5% interest rate cut the prior day. Isolating the performance on the effective date of Sept. 20, the additions were up 0.4%, while the deletions were down -1.8%, thus closing out the positive spread move for the week and overall since the Sept. 6 announcement.

Outside of the additions and deletions, the share float changes marked a significant portion of this rebalance as far as traded value. Most notable were the moves from the mega-cap stocks, which included the large upweight in Apple. Over the rebalance period, Apple’s performance was mixed and included a volatile finish with a shift up of 2% and a subsequent selloff of 2% over the final hour as the market close was reached on Sept. 20. Other mega-cap movers were Broadcom and Amazon, each having a share float increase, traded up on the effective date and outperformed the S&P 500 index by 19.8% and 6.3% respectively since the announcement date.

What the Rebalance Means to Investors and Index Managers

The September rebalance, which is inclusive of additions, deletions, and share float adjustments, requires close examination and precise implementation. Given the amount of assets that track the S&P 500, trading volume increased significantly for the added and deleted companies, along with stocks with share and/or float changes.

Attentive analysis is crucial to understand how an impending index rebalance will shape the index, and by extension, the portfolios that track it. We believe this requires a careful review of liquidity conditions, expected trade flows and optimal trade strategies. The aim for portfolio managers is to keep tracking error to a minimum while ensuring that the market impact and trading costs related to rebalancing do not erode wealth over time.