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.
1 S&P Dow Jones Indices Annual Survey of Assets as of December 31, 2023.
2 5th largest index manager according to Pensions & Investments’ Special Report on the Largest Money Managers released June 12, 2023. The ranking is based on total worldwide assets under management as of December 31, 2022.
3 Instinet Research, September 7, 2024
IMPORTANT INFORMATION
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Not FDIC insured | May lose value | No bank guarantee
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© Northern Trust
More Asian/European Markets Topics >