Index Methodology – Maintenance

Index maintenance involves the rebalancing and/or reconstitution mechanism as well as rules to cope with corporate actions such as merger & acquisition, spin-off, split, delisting etc.

Annual and quarterly rebalancing are very commonly practiced in index industry, for certain types of index, monthly rebalancing schedule is warranted by business or data nature constituting the indexes.

With regard to rules on corporate events, we’d refer to the Dow Jones Global Indices document to understand the common practices in this space.

First, mergers, takeovers, delistings or bankruptcies, between rebalancings, a company can be deleted from an index due to these events. Changes to index composition and related weight adjustments are made as soon as they are effective. These changes are typically announced two business days prior to the implementation date.

Second, IPOs and new listings on eligible exchanges are added to their respective indices at the next periodic update if the new listing meets all eligibility requirements. The reference date for IPO inclusions will be five weeks prior to the effective rebalance date.

Lastly, the spun-off company is added to all indices of which the parent is a constituent, at a zero price at the market close of the day before the ex-date (with no divisor adjustment). If a spun-off company is determined not to be eligible to remain in the index, it will be removed after at least one day of regular way trading (with a divisor adjustment). Spinoffs are assigned the same size and style as the parent company at the time of the event. All spinoff sizes are evaluated at the next quarterly update.

Generally, no companies are added to an index between annual reconstitutions except for IPOs and spinoffs. Any exceptions to this rule are announced to clients with ample lead-time. Any stocks considered for the addition at the quarterly rebalance must have a float market cap larger than the smallest stock included in the given market index at the time of the previous reconstitution.

What outlined above is just a representative practice carried out by S&P Dow Jones Group. Other indexers certainly are free to apply different rules. For example, FactSet Natural Gas Index indicates that if a constituent spins or splits off a portion of its business, both the spun-off companies and the parent companies (with the highest market value relative to the spun-off companies) will be kept in the index, and be considered for removal from the index at the next Reconstitution or Rebalance Day should they fail to meet eligibility criteria.

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