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Lesson 10 of 10 · 13 min
Rebalancing in shares, weight drift and reconstitution rules
Rebalancing an equal-weighted index means recomputing the number of shares of each stock from the index's new value; if it is skipped, the weights drift and the index stops returning the simple average, and reconstitution follows a fixed rank-announce-implement process with buffers to limit turnover.
In short
- Rebalancing an equal-weighted index: target value per stock = aggregate value ÷ N; new shares = target value ÷ current price. Fractional shares are normal.
- A total return version first adds the dividends to the aggregate value, then works back to shares.
- The simple average of constituent returns equals the equal-weighted index return only since the last rebalancing; afterwards the drifted weights decide.
- Reconstitution steps: rank and assess eligibility → announce preliminary and then final changes → implement at the close of the reconstitution date; adjust the divisor to keep the index continuous.
- Providers limit turnover with bands and rank buffers; ETFs and index derivatives must follow every reconstitution.
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