In this series, the Bloomberg Indices team breaks down some key concepts of our index creation and maintenance process.
When markets and companies change, so do the indices that are meant to track them. In order to accurately maintain a representation of each specific market, sector, or strategy, index providers enact a systematic review process called reconstitution. During that process, companies are evaluated to determine where they rank along market cap thresholds, security counts, and investment styles based on the criteria outlined in the associated Index Methodology. As a result, existing companies may no longer be eligible for index inclusion so they may be removed, or new companies may be included if they have now passed the eligibility criteria.
The process explained
The flagship Bloomberg Global Equity Indices are designed to ensure investability and broad market representation by following a rules-based, semi-annual reconstitution schedule. The semi-annual periodicity achieves the goals of maintaining relevant index membership while limiting excessive turnover. This design of minimizing turnover is important as index consumers passively tracking the index will overall see lower trading costs and accrue realized capital gains less frequently. The reconstitution process begins with membership screening of the eligible equity universe for criteria such as trading volume, seasoning, free float market capitalization, foreign investment limits (FIL), stock exchange specification restrictions and sanctions. Then, each company and its securities are classified to a single country. Generally, this market classification corresponds to a company’s primary listing when it is the same as its country of incorporation. However, there are exceptions where the general rule is not applicable such as when the primary listing is a foreign listing.
Once a company’s country is defined, total market capitalization is used to classify securities into size segments. For Developed Markets, Bloomberg uses a company’s total market capitalization corresponding to a cumulative free float market capitalization of 70% for the Large Cap cut-off, 85% for the Mid Cap cut-off, and 99% for the Small Cap cut-off. Finally, buffer zones are used to manage the migration of securities between different size segments.
The semi-annual reconstitution becomes effective on the close of the second Wednesday of March and September. The full set of changes are announced publicly with 10 full business day advance notification and further details on each of the steps can be found in the Bloomberg Global Equity Index Methodology.
Reconstitution in action
In March 2023, Bloomberg’s Equity Index team completed the first reconstitution of the year. Here are few summary points from the March reconstitution:
- Global equity markets rose slightly in size, with the measured market cap of the flagship Bloomberg World Large & Mid Cap Index (WORLD Index) up less than one percent from $58.2 trillion as of the prior reconstitution in September to $58.6 trillion. Index turnover was 2.09% with 71 additions and 89 deletions.
- Sector gains were led by Industrials and Materials with both contributing double digit performance returns. On the downside, the largest sector detractors to performance were Utilities, Real Estate, and Consumer Discretionary.
- From a country perspective, the United States was the largest contributor to positive performance followed by France and Japan. India was the largest detractor to performance followed by Saudi Arabia, Qatar and Indonesia.
- Electricite de France SA (EDF FP Equity), a Large Cap classified in France, was removed to account for the ongoing nationalization by the French Government. The company’s free float has seen a significant reduction post the selection date and is now below the minimum requirement of 10%.
The full reconstitution summary report is available here and shares more details.
Learn More About Bloomberg Equity Indices
By assessing index membership semi-annually with best in class market data, the Bloomberg Global Equity Indices offer a compelling alternative to existing equity benchmark providers. With availability in global, regional, country, and sector exposures, calculated in various currencies and return types, the Bloomberg Equity Index team can help educate you on the offering and explore the indices in more detail.
Visit I<GO> on the Terminal or browse our website to find out more about Bloomberg’s Equity Indices and request a consultation with an index specialist.
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