Money Left on the Table II – Why You Should Think About the Timing of the Reconstitution
The majority of the rules-based benchmark indices reconstitute periodically on a fixed schedule to reflect changes in the market. When the timing of reconstitution is not a decision at will, it can lead to remarkable dispersion in the long-run performance out of “timing luck”.
Historically, we observed that the return difference between various indices belonging to same size segment was not statistically significant. We further noted that the pattern of impact of reconstitution rank belonging to the same size segment was random. Lastly, the turnover of the indices belonging to the same size segment was very similar.
Therefore, we concluded that for index trackers, it is difficult to time the reconstitution for higher gains and spreading it over different periods may be an alternative to remove the timing factor.
- We observed that the return difference between various indices rebalancing annually in different months of a year belonging to a respective size segment was not statistically significant for the majority of the cases
- We discovered that within the respective size segments, the pattern of impact of reconstitution rank of indices rebalancing annually in different months of a year was random
- The one-way turnover of indices rebalancing annually in different months of a year was very similar within the respective size segments historically
To find out more about the trade-off between the impact of reconstitution and costs from turnover, please click here or on the graphic below to download our white paper.
Download the first and third Paper of our Money Left on the Table Series here: Money Left on the Table I – Passive Investing and the Effects of Reconstitution & Money Left on the Table III – A Deeper Look into the Effects of Liquidity and Reconstitution