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Index rebalancing and stock market composition: Do indexes time the market?

Marco Sammon & John J. Shim

Journal of Financial Economics2026https://doi.org/10.1016/j.jfineco.2025.104229article
FT50UTD24AJG 4*ABDC A*
Weight
0.41

Abstract

Value-weighted indexes must rebalance in response to stock market composition changes, e.g., issuance, buybacks, and IPOs. In doing so, existing index funds implicitly engage in market timing. Index funds’ long-short rebalancing portfolios have an annualized return of 4.61% and load negatively on value and profitability factors. We estimate these trades impose a 46–69 bps annual index-level performance drag. We explore alternative value-weighted indexes that rebalance less and delay responding to compositional changes. Despite still closely tracking the market, these indexes improve market timing and lower trading costs, saving 50 bps annually, an order of magnitude greater than index fund fees.

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https://doi.org/https://doi.org/10.1016/j.jfineco.2025.104229

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@article{marco2026,
  title        = {{Index rebalancing and stock market composition: Do indexes time the market?}},
  author       = {Marco Sammon & John J. Shim},
  journal      = {J.~Financ.~Econ.},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1016/j.jfineco.2025.104229},
}

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Evidence weight

0.41

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.25 × 0.4 = 0.10
M · momentum0.55 × 0.15 = 0.08
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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