As we mentioned before, index rebalancing days tends to result in much larger closing bids. This is because most index funds are fully match what directory providers do and directory changes occur using: official closing price.

For example, a typical close accounts for less than 10% of the day’s trading volume; Meanwhile, some index rebalance dates see more than 30% of volume traded at close.

Based on this information, we can use the size of closing transactions on index addition days to estimate total index fund tracking. The results show that many companies may own nearly a quarter of the publicly traded shares purchased by different index funds.

It’s important to note that companies benefit from being added to major indices as they see significant new (and often long-term) investors.

There are large closing volumes on index rebalancing days

As the data in the chart below shows, not only few dates Each year index transactions usually take place:

• MSCI is (typically) at the end of May and November. The S&P, Nasdaq and FTSE indices rebalanced on the third Friday of the last month of the quarter. This is “four witchday, which pushes closing volumes even higher.
• Russel It rebalances its indices once a year, usually on the last Friday of June. Negative quarter end.

Chart 1: Extraordinarily large closing volumes are seen on index rebalancing days

A typical close currently contributes to approximately $40 billion in trade; This is less than 10% of the volume traded on the day (gray dots).

In comparison, the S&P and Russell index traded an average of $240 billion at close date, accounting for more than 30% of daily volume (ADV). Even MSCI rebalances cause the close to rise to around 20% of ADV.

Using closing trades to predict index tracking

There are two ways we can estimate how much index funds that track each index add:

1. Top down: Sometimes directory providers to reveal How much money follows the indices? Some academics we also included all index fund holdings from 13F filings. You can even try to reconcile this ICI statements Today, index funds are said to account for approximately 50% of all mutual funds.
2. bottom up: Another way is behavioral; looking at how many shares actually traded on the index rebalancing dates. Knowing that index funds only buy what you really need rebalancing trade date and for this to follow correctly index before When the market is open the next day, many funds choose to trade the moment the indicator changes (which is the close!), which represents another way to see how big index funds can be.

Today, we use a bottom-up approach to see how many publicly traded stocks actually traded on rebalancing dates across the major US indices. The results (Graph 2) show that:

• Small caps actually have a significant proportion of index tracking; 27% combined for the S&P 600 and Russell 2000.
• Although a large cap applies to all three major indexes, including the Nasdaq-100®, up to 28% of its publicly traded shares may be held by index funds.

Although many more dollars are indexed to the S&P 500, $7.5 trillionWhat we’re measuring here is the percentage of each company’s publicly traded shares, and that’s consistent Across all companies in each index.

Chart 2: Index day closing trading shows index-tracking funds may own around 25% of publicly traded shares in many companies

More importantly, neither the top-down nor the bottom-up approach is perfect. Some futures and options While hedges can trade like index funds, true index funds can take positions in advance to try to limit the market impact of predictable index trading. Some also claim that some active funds trade like “closet indexers.”

Closing volumes must now include some off-exchange transactions

Off-exchange trading is growing. This is also true nearby.

Exchanges and brokers may publish “echo prints” that copy the official closing price (MOC) but are also called “echo prints.”tape”After finding out what the official closing price is.

In this study, we add echo print transactions that occur between 16.00-20.00 and are at MOC price to the “MOC volumes” we used above. Interestingly:

• On a typical day, we see echo pressures averaging around 30% of MOC volumes (gray dots in Chart 3).
• On a day when the index is rebalancing, the official close looks more important, with echo prints accounting for around 20% of all transactions.

Chart 3: Echo prints contribute a consistent proportion of total MOC priced trade

Normal closing transactions are likely some of the transactions on the index rebalancing dates

Some may also wonder if we should not subtract “normal” or non-index MOC volume from the above totals. Especially considering we said earlier that MOC is generally more active (and less directory) more than people think.

However, when we look at how much volume is traded at a “normal” close and compare that to the trading volume we see on index addition dates, we see that any adjustments would be rounding errors (as seen in Chart 4).

The reason why index transactions appear much larger in this view is that the data in chart 1 all While market – index transactions generally only affect the market added stocks – so the impact on the index adding stock is magnified (or focused).

This also reveals how important index additions are for companies. These result in a significant portion of total publicly traded shares being purchased by index funds, and index funds often long term owners.

Chart 4: “Normal” MOC activity is a portion of index trading on the rebalancing day

The data in Chart 4 also shows the typical distribution of the results we averaged in Chart 2. Although the average S&P 500 addition contributes 16% of a company’s publicly traded shares, actual trading typically ranges from 14% to 18%, and sometimes much more. .

It is also worth noting that most of the S&P additions occurred away from the quadruple witch. This is important because the quadruple witch trade can exaggerate S&P results.

Typically, the S&P’s quarterly rebalance includes “other” index changes such as volatility, style, and sharing outstanding updates. Because the S&P 500 has always been a “500 company” index, additions are often made when another company leaves the index (usually through mergers and acquisitions). To be fair, the last few quarters of rebalancing have included some promotions and discounts to reallocate stocks into more favorable market cap buckets.

Index inclusion is good for companies

We know that index addition creates significant liquidity in the added stock.

This research shows how much of the publicly traded shares changed hands on those dates and were likely purchased by index funds.

More importantly, index inclusion is mostly good for companies. Index funds are a large, long-term, new investor base. Including the index also increases interest from active investment funds, which could increase access to U.S. capital for future investments.

Economic Research Senior Specialist Nicole Torskiy contributed to this article.