Comment by yorwba
13 hours ago
I thought the point of index funds weighting by market cap is that they don't require rebalancing, because the weight of stocks in the index exactly tracks price movements. You just keep holding the exact same number of shares, and more valuable stocks automatically take up more of your portfolio.
Yes, this is one of the benefits of a cap-weighted index fund.
It doesn't eliminate the need for the fund to rebalance, because of companies moving in and out of the index criteria.
But it certainly vastly reduces the need of the fund manager to trade.
(Also, stock buybacks and new share issuance should in principle not change a company's index weight, but in practice they sometimes do.)
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If you pick stocks with the correct weight to track the index, you're effectively running an index fund. And so you don't have to rebalance to keep tracking the index.
1 If you never rebalance, you're never adding new stocks to the index, nor removing stocks that do not belong to it anymore.
2 You need to rebalance to take corporate events into account: new stocks, buybacks, dividends, etc...
3 replies →
Indexes rebalance frequently. The "correct weight" today, won't be the correct weight in a year.
What are you talking about? Those index fund are constantly rebalancing. This is why you buy an index fund, so you don’t have to constantly rebalance your portfolio.