Aussie shares cost 8% more on rebalance days: DimensionalBY KARREN VERGARA | FRIDAY, 24 JAN 2025 12:22PMInvesting in the S&P/ASX 300 on a day it rebalances puts an 8% premium on share prices, a phenomenon that follows major global indices, new research from Dimensional Fund Advisors finds. The analysis studied the reconstitution activity of four other popular indices - FTSE 100, S&P/TSX 60, EURO STOXX 50, and Nikkei 225 between 2014 to 2023. Investors in the local index tend to pay 8% more on average to buy shares on the rebalance date compared to the month prior. This then drops to 2.2% on average in the month following the rebalance date, the Measuring the Costs of Index Reconstitution report found. Across all major indices, additions and deletions outperform their respective indices by 3.5% in the month leading up to the index reconstitution, dropping in price by an average reversal of 2% in the month following the rebalance date. Further, shares added to indices costs 4% more to buy on rebalance days compared to the previous month. This dropped 6% on average the next month following their addition. While index funds offer some advantages that investors often find appealing, such as low expense ratios and broad diversification, Dimensional said their objective of minimising tracking error versus an index can lead to implementation costs that "hurt returns." The research also found the "rigidity of having to trade specific securities in specific amounts on specific days forces index funds to demand immediacy, which comes at a cost." This cost is not reflected in expense ratios of index funds but tends to detract from their returns as it is priced into the returns of the indices. "A better approach to portfolio design and management would be a daily process that uses information from market prices every day and spreads turnover across all trading days in the year, with flexibility across stocks, quantities, and time," Dimensional said. "Such an approach can help investors target higher expected returns while also managing risks and costs in the global opportunity set." Related News |
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