How often do cap weighted funds get adjusted?

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ChinchillaWhiplash
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How often do cap weighted funds get adjusted?

Post by ChinchillaWhiplash » Tue Sep 18, 2018 9:46 am

For example: VT Vanguard Total World Stock ETF. How often is it adjusted to the index? Is it a set time? If there were some extreme event to throw the % way off all of a sudden, would there be adjustments to AA right away or not? Just trying to wrap my head around how this stuff works :confused

alex_686
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Re: How often do cap weighted funds get adjusted?

Post by alex_686 » Tue Sep 18, 2018 9:54 am

Every index is different. Read the methodology papers associated with the index to figure out the exact impacts. They tend to fall into 2 classes.

Most indexes update the stocks in the index each quarter. There is a decent lead time so nobody is surprised. Most are structured so there are no surprises. For example, IPOs don't count for the first 90 days. Companies have to be below market cap of X for 90 days to be dropped. Things like that.

Most indexes make frequent adjustments to reflect changes in capital structure. Most are minor. Adjusting free float due to stock buy backs is a example. Larger adjustment would be a merger between 2 companies. However, most of the time both of the companies are already in the index so the impact is low - one just has to add another small company to the index. Hard to think of any major impacts to the index. Apple going private or re-registering as a foreign company would be a example.

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David Jay
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Re: How often do cap weighted funds get adjusted?

Post by David Jay » Tue Sep 18, 2018 10:11 am

Remember that cap weighted means that there is virtually need to rebalance or adjust due to market fluctuations. This is the beauty of cap weighting. If Apple were to drop by 50% tomorrow, it would not affect the holdings in a cap-weighted fund.

The only times there is a need to buy or sell is when there are net inflows/outflows or when there is an index change. I'm sure minor, technical adjustments are made from time to time, but no regular buying and selling. Hence the low operating expenses.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

MotoTrojan
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Re: How often do cap weighted funds get adjusted?

Post by MotoTrojan » Tue Sep 18, 2018 10:15 am

ChinchillaWhiplash wrote:
Tue Sep 18, 2018 9:46 am
For example: VT Vanguard Total World Stock ETF. How often is it adjusted to the index? Is it a set time? If there were some extreme event to throw the % way off all of a sudden, would there be adjustments to AA right away or not? Just trying to wrap my head around how this stuff works :confused
VT was a poor example. A small-cap fund will update (likely quarterly but it can vary) if a company grows to be too big for that index. Similarly if a nation moves from being an emerging market to developed. VT includes the lot so not many things that can create a substantial change.

ChinchillaWhiplash
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Re: How often do cap weighted funds get adjusted?

Post by ChinchillaWhiplash » Tue Sep 18, 2018 10:26 am

Ahh, that all makes sense. Thanks for clearing that up for me. Kind of looks like VT is the way to go for a cap weighted global equities.

If one were to build VT on their own, would be cap weight % of US stocks, DW stocks, EM stocks that are as close to the holdings of VT and let it roll. Only balancing would be for equities to bond proportions.

alex_686
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Re: How often do cap weighted funds get adjusted?

Post by alex_686 » Tue Sep 18, 2018 10:37 am

ChinchillaWhiplash wrote:
Tue Sep 18, 2018 10:26 am
If one were to build VT on their own, would be cap weight % of US stocks, DW stocks, EM stocks that are as close to the holdings of VT and let it roll. Only balancing would be for equities to bond proportions.
And between US, DW, and EM stocks. The ratio between these 3 different class of stocks can drift. Not much, but they still drift.

MotoTrojan
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Re: How often do cap weighted funds get adjusted?

Post by MotoTrojan » Tue Sep 18, 2018 10:46 am

Also you can review the turnover % for each fund. 100% means the average asset is held 1 year. VT will be awfully close to 0%. An active trading fund could be well over 100%.

MotoTrojan
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Re: How often do cap weighted funds get adjusted?

Post by MotoTrojan » Tue Sep 18, 2018 10:47 am

alex_686 wrote:
Tue Sep 18, 2018 10:37 am
ChinchillaWhiplash wrote:
Tue Sep 18, 2018 10:26 am
If one were to build VT on their own, would be cap weight % of US stocks, DW stocks, EM stocks that are as close to the holdings of VT and let it roll. Only balancing would be for equities to bond proportions.
And between US, DW, and EM stocks. The ratio between these 3 different class of stocks can drift. Not much, but they still drift.
Unless a nation moves indexes it won’t drifr much at all. If EM becomes a bigger part of the global market then your EM fund will grow to be a bigger part of your homegrown VT.

alex_686
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Re: How often do cap weighted funds get adjusted?

Post by alex_686 » Tue Sep 18, 2018 10:52 am

MotoTrojan wrote:
Tue Sep 18, 2018 10:47 am
Unless a nation moves indexes it won’t drifr much at all. If EM becomes a bigger part of the global market then your EM fund will grow to be a bigger part of your homegrown VT.
Or EMs have a higher capital formation than DM. i.e., more new issues. Or the flow of corporate mergers are unbalanced. i.e., more DM and EM companies buying US companies than the other way around. It drifts.

Whakamole
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Re: How often do cap weighted funds get adjusted?

Post by Whakamole » Tue Sep 18, 2018 2:41 pm

MotoTrojan wrote:
Tue Sep 18, 2018 10:46 am
Also you can review the turnover % for each fund. 100% means the average asset is held 1 year. VT will be awfully close to 0%. An active trading fund could be well over 100%.
The last reported turnover rate for VT (last October) was 9.9%. VTI's (US total stock) turnover rate was 3.1%., and VXUS (International total stock) was 3.4%. I wonder why.

alex_686
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Re: How often do cap weighted funds get adjusted?

Post by alex_686 » Tue Sep 18, 2018 2:46 pm

Whakamole wrote:
Tue Sep 18, 2018 2:41 pm
MotoTrojan wrote:
Tue Sep 18, 2018 10:46 am
Also you can review the turnover % for each fund. 100% means the average asset is held 1 year. VT will be awfully close to 0%. An active trading fund could be well over 100%.
The last reported turnover rate for VT (last October) was 9.9%. VTI's (US total stock) turnover rate was 3.1%., and VXUS (International total stock) was 3.4%. I wonder why.
MotoTrojan explanation is not quite on mark. A index fund could, in theory, have a turnover rate of over 100% and not see any change in the index members. IIRC, turnover is Sales / Net Assets. So if a fund has a constant outflow of funds it would have a high turnover ratio. Note, this is not net sales - it is gross sales. Many mutual funds have outflows on one day and inflows on another. I suspect that VT is a growing fund, which would artificially depresses the turnover ratio.

MotoTrojan
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Re: How often do cap weighted funds get adjusted?

Post by MotoTrojan » Tue Sep 18, 2018 2:58 pm

alex_686 wrote:
Tue Sep 18, 2018 2:46 pm
Whakamole wrote:
Tue Sep 18, 2018 2:41 pm
MotoTrojan wrote:
Tue Sep 18, 2018 10:46 am
Also you can review the turnover % for each fund. 100% means the average asset is held 1 year. VT will be awfully close to 0%. An active trading fund could be well over 100%.
The last reported turnover rate for VT (last October) was 9.9%. VTI's (US total stock) turnover rate was 3.1%., and VXUS (International total stock) was 3.4%. I wonder why.
MotoTrojan explanation is not quite on mark. A index fund could, in theory, have a turnover rate of over 100% and not see any change in the index members. IIRC, turnover is Sales / Net Assets. So if a fund has a constant outflow of funds it would have a high turnover ratio. Note, this is not net sales - it is gross sales. Many mutual funds have outflows on one day and inflows on another. I suspect that VT is a growing fund, which would artificially depresses the turnover ratio.
Interesting. Thanks for the insights.

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thedeadlybishop
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Re: How often do cap weighted funds get adjusted?

Post by thedeadlybishop » Tue Sep 18, 2018 4:50 pm

As mentioned previously each index provider does things a bit differently.

The CRSP Indexes that Vanguard uses are the most unique in that they employ patient migration of securities that includes a partial weight. This is most evident in the style indexes like value and growth where say if a security crosses into the value threshold one quarter only half a weighting of the security is bought by the index and if the security remains in the value threshold the next quarter, the security receive a full 100% weighting in the index.

Thesaints
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Re: How often do cap weighted funds get adjusted?

Post by Thesaints » Tue Sep 18, 2018 5:31 pm

Just look at VT's daily tracking error. If it is normally close to zero (±0.25%) that means they rebalance often enough.

jalbert
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Re: How often do cap weighted funds get adjusted?

Post by jalbert » Tue Sep 18, 2018 6:39 pm

ChinchillaWhiplash wrote:
Tue Sep 18, 2018 9:46 am
For example: VT Vanguard Total World Stock ETF. How often is it adjusted to the index? Is it a set time? If there were some extreme event to throw the % way off all of a sudden, would there be adjustments to AA right away or not? Just trying to wrap my head around how this stuff works :confused
Index funds may need adjustments to invest excess cash, liquidate assets to replenish the cash position after withdrawals, or implement changes to the float weights or makeup of the index. There are not sudden extreme events that require major shifts in the allocation.
Risk is not a guarantor of return.

jalbert
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Re: How often do cap weighted funds get adjusted?

Post by jalbert » Tue Sep 18, 2018 6:45 pm

Ahh, that all makes sense. Thanks for clearing that up for me. Kind of looks like VT is the way to go for a cap weighted global equities.
It is a reasonable choice. It has not been as tax efficient as holding VTI & either IXUS or VXUS. If you hold a US index and total non-US index in market cap-weight proportions you don’t have to rebalance. There is no magic about them being in the same fund that precludes having to rebalance between them but rather the fact that they are held at market cap weight.
Risk is not a guarantor of return.

TropikThunder
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Re: How often do cap weighted funds get adjusted?

Post by TropikThunder » Tue Sep 18, 2018 7:53 pm

Whakamole wrote:
Tue Sep 18, 2018 2:41 pm
MotoTrojan wrote:
Tue Sep 18, 2018 10:46 am
Also you can review the turnover % for each fund. 100% means the average asset is held 1 year. VT will be awfully close to 0%. An active trading fund could be well over 100%.
The last reported turnover rate for VT (last October) was 9.9%. VTI's (US total stock) turnover rate was 3.1%., and VXUS (International total stock) was 3.4%. I wonder why.
The index that VT follows (FTSE Global All Cap Index) does not include the total US Total Stock Market like the one VTI follows (CRSP US Total Market Index). VTI has ~3,600 US companies while VT has only ~1,800 US companies. My guess is part of the higher turnover is due to more churning at the micro-cap end of the FTSE Global index but I doubt this is the only explanation.

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