Every quarter, S&P-Dow Jones rebalances its flagship market-capitalization index series, including the S&P 500. Although the changes may appear small on the surface, they drive significant trade volumes in the market over a short time horizon. According to S&P estimates, $11.45 trillion in assets track the flagship S&P 500¹ with a large portion of that in passive assets. While all investors should be aware of these changes, it is especially important for index managers who are tasked with tracking indexes with a high level of precision.

As one of the world’s leading managers of index assets², rebalance periods at Northern Trust are a lively time when collaboration is key. Every portfolio we manage that is benchmarked to the S&P 500 and other indexes need to be rebalanced to ensure we achieve our primary objective: match the risk and return characteristics of the benchmark. Precise management matters, as investors have little to no tolerance for tracking error when it comes to their index investments.

Key Changes in the Index

Notable in this quarter’s index rebalance, effective prior to the open of trading on March 18, S&P Dow Jones Indexes added computer hardware and server company Super Micro Computer Inc., with a weighting of 0.10% in the index.  

Super Micro was previously a constituent in the S&P Midcap 400 index and is in the midst of a rapid rise of its market capitalization, which is a reflection of demands for its high performance hardware to meet artificial intelligence related solutions. The company has long standing partnerships with key component suppliers, such as NVIDIA, Advanced Micro Devices, and Intel.  Its stock has posted an astonishing 276% return year to date, while coming off returns of 246% in 2023, and 87% in 2022 — a year where the broader information technology sector suffered. This stock was added to the mid cap index just over a year ago in December of 2022, when its market cap was a mere $4.5 billion.  Now, Super Micro carries a benchmark market cap of $53 billion, well above the $32 billion median market cap for companies in the S&P 500. 

The quick migration through the capitalization spectrum does create some exposure overlap for passive investors that utilize size segment indexes with other index providers.  For example, Super Micro is approximately a 2% weight in the Russell 2000 index ( a widely accepted representation of the U.S. small cap universe), easily its top holding.  Russell will reconstitute their U.S. index family later this year, which will take effect after the market close on June 28.

The other addition is footwear and apparel company Deckers Outdoor Corp., with a weighting of 0.05%.  S&P removed Whirlpool Corp. and Zion Bancorporation N.A., a personal and commercial banking company, from the index.  More details on key weight changes are in Exhibit 1.

EXHIBIT 1: KEY CHANGES IN THE S&P 500

Super Micro joined the index with a weighting of 0.10%. Overall, two companies were added while two were removed.

Sector and Industry Impact

The rebalance also modestly changed the sector and industry composition of the index, as shown in Exhibit 2. At a sector level, information technology increased the most through the addition of Super Micro. Communication services and industrials declined the most partly because of share decreases in social media giant Meta and aerospace company RTX Corporation. Industry movements largely followed sectors. The technology hardware storage and peripherals sector gained the most through Super Micro while interactive media fell the most primarily due to Meta.

EXHIBIT 2: SUPER MICRO INFLUENCES SECTOR AND INDUSTRY WEIGHTING CHANGES

The addition of Super Micro boosted the weightings of the information technology sector and the technology hardware industry.

Aligning the Index Portfolio to the Changes

As an index portfolio manager, we look at increased weightings for companies as “buys” and decreased weightings as “sells,” as that is how we need to trade the portfolio to align with the rebalancing. The weightings of the buys and sells must be equal to maintain full investment in the index, and in this case each side of the S&P 500 rebalance represented 0.28% in the index. The buys include 0.16% for the two new additions plus 0.12% for companies with weight and share increases and the sells included the 0.03% reduction for the two companies deleted and 0.25% for weight and share decreases, such as when companies repurchase shares. All weights mentioned above are based on March 1 close prices, when S&P announced the changes. 

Performance of the S&P 500 Rebalance

The March rebalance reverses a recent trend in its overall trade size with this event being smaller than the previous three quarters, which all contained large additions straight into the index.  This rebalance only includes additions that are upgrades from the S&P Midcap 400 index, which can add complexities as index managers and market participants size up the performance impact.

For example, there will be selling volume along with buying demand as a stock migrates from a midcap index to the large cap index.  Adding this variable along with other catalysts driving stock prices beyond the rebalance itself, such as macro events and those specific to companies, does make for an interesting examination as we move from the announcement date to the effective date of the trade. 

In the case of this rebalance, adds outperformed deletes with the adds reflecting a pop on the announcement date, largely driven by Super Micro.  That positive performance spread carried through for the entire period, although both additions did sell-off on the trading day, meaning the market close was the best time of the day to buy the additions.  Excluding the adds and deletes, increases and decreases, which tracks those companies that have share changes, float changes, and the appropriate directional funding trade, differed in their performance and finished with decreases outperforming increases.  These results are shown in Exhibit 3. The increases underperformed the decreases since March 12, with negative contributions from Tesla, Broadcom, and Amazon, all companies with share increases. 

EXHIBIT 3: PERFORMANCE OF THE S&P 500 REBALANCE

When added companies outperform the deleted companies, that is referred to as “right way” which occurred over the entire period since the release of the index changes on March 1, however, that wasn’t the case on the final trading day.  The performance of the companies with increases in weights relative to those with decreases did underperform over the entire period. 

What the Rebalance Means to Investors and Index Managers

The March rebalance, albeit smaller relative to other quarterly changes over the last year, always requires a close examination and precision implementation. Given the amount of assets that track the S&P 500, trading volume increases 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 thoughtful analysis with the aim of keeping tracking error to a minimum while ensuring that the market impact and trading costs related to rebalancing do not erode wealth over time.