On Friday two big events took place in the stock market – the semi-annual rebalancing of the FTSE and WisdomTree.
The act of rebalancing comes after an index readjustment which can be done in different ways by adding new stocks to the index, removing a particular stock from the index, or even increasing or decreasing the weighting of the index. existing stocks in the index.
Index reconfigurations are a key event for the market as they help market participants assess the direction in which funds are moving, said an institutional trader at a national brokerage firm.
An increase or decrease in the weight of shares, or the addition or deletion of a share, suggests new inflows or outflows of funds and several investors are positioning themselves on the market accordingly, he added.
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A readjustment of the index is followed by a rebalancing exercise by exchange traded funds or mutual funds that mimic the index, in order to realign their portfolios according to the changes.
The components of the index are reorganized in such a way as to maintain the proportion of the asset allocation or to keep the risk at a level consistent with the declared methodology of the index.
âReconfigurations within the underlyings of the index are generally carried out according to defined timetables. Each index has a clearly stated underlying methodology. constituents and weights are realigned periodically to align closely with the stated principles, âsaid Nirav Karkera, head of research at Fisdom.
âWhile index rebuilding and rebalancing activities should ideally be viewed as mere maintenance exercises, inclusion or exclusion has been observed to impact the prices of particular stocks. This can mainly be attributed to the change in capital flows directed to the particular stock driven by index ETFs and mutual funds that invest in the index and not in the particular underlyings. The expectation of such a phenomenon associated with the inclusion or exclusion of a company’s stock snowballing into relatively greater impact by active traders trying to preempt change flows and modify trades to be on the safe side of change, âKarkera added.
The changes made during the semi-annual review of the FTSE – Asia-Pacific Global Equity Index Series excluding Japan, Japan and China will take effect from Monday, September 20.
Rebalancing activity typically begins a few days before the change implementation date.
The stocks that are expected to record the most significant inflows as part of the FTSE rebalance are Adani Transmission, HDFC Life Insurance Co, Max Financial, Max Health and Laurus Labs, according to Abhilash Pagaria, assistant vice president – Research, Edelweiss Alternative Research.
Those stocks could generate inflows of $ 36 million to $ 116 million as part of the rebalancing exercise, Pagaria said in a note.
Meanwhile, the street also had an eye on the replenishment of the US-based WisdomTree India Profit Index, which takes place annually. The rebalancing for the same also took place on Friday.
The US-based fund will add Indian Oil Corporation (IOC), Vedanta, Jindal Steel & Power and Info Edge to its index.
At the same time, the fund will increase its weighting in Reliance Industries Ltd (RIL), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation, Axis Bank and ICICI Bank, but will decrease its weighting in Housing Development Finance Corporation (HDFC), Infosys, Tata Services consulting firm, Hindalco Industries, GAIL India and Grasim Industries, according to Pagaria.
In terms of the highest inputs, RIL, IOC and BPCL would lead the charge while HDFC and Infosys are expected to attend the highest outputs, according to the Edelweiss Alternative Research note.
(Edited by : Jomy Jos Pullokaran)