Index Tracking

Index Tracking over the Rebalance

High quality, timely rebalance data drives returns for Index Tracking Funds

As we pass through one of the oddest rebalance seasons in memory it comes as a timely reminder of how important the rebalance period is, why data is central to it and why your provider must get it right…

Having access to quality rebalance data, in a timely manner, is fundamental to the success of an Index Tracking Fund. With the rise of Index Plus strategies from the passive houses and the squeeze on costs for ETFs and Mutual Funds alike taking advantage at Index Rebalances can help generate extra return for the Asset Managers as well as the Fund’s clients. Ensuring Portfolio Managers have access to index changes, whether that be up or down weightings, additions, deletions or intra-cap movements, it means Managers can analyse the full picture and strategize the best way to realise the potential from these changes.

As often seen with index additions prices can increase to artificial high levels the closer to the effective date. The more rigid passive houses will stick as closely to the close index positions as possible however firms that adopt an Index Plus strategy can enjoy the flexibility of value add trading. If the Portfolio Manager gets validated data in good time they will be able to take advantage of lower prices, slowly increasing their holdings to ensure by effective date their fund is in line with the open weights on rebalance. Of course, the opposite happens for the deletions where Portfolio Managers may be able to sell out of positions at a higher price than they would get on effective date.

With some Index Providers offering preliminary rebalance files intra-cap movements can be spotted and traded upon before your competitors get sight of the full rebalance data and this is where the true value add comes into place for the Index Plus Fund. During these periods the market may not have full knowledge to the upcoming changes. Asset Managers who may have passive and active desks within their firms could do no worse than simply engaging in conversation during these times as in specie trading can be a very cost-effective way to implement index rebalances. The passive manager may have no choice to sell out of their position as they track their benchmark however the active managers may spot the opportunity of purchasing unfashionable stock at a lower cost unlocking its unrealised value.

Of course, without sight of the rebalance data early Portfolio Managers face unnecessary liquidity risk. If you track against one of the headline indices, then you are in a position around the effective date of facing competition to buy or sell the same stock as your peers. This can pose significant risk of a liquidity squeeze where you end up holding out of benchmark stock or missing the opportunity to purchase ahead of the stocks entry. This liquidity risk can expose a Portfolio Manager to tracking error in both of these examples so mitigating this with access to quality rebalance data is essential.

Partnering with an aggregator who not only understands the importance of this data and its use cases but can validate and standardise it making it as easy to consume as possible should be integral to any Portfolio Manager looking to take advantage of unlocking this valuable data during the busiest of trading periods.