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by pjfin123
600 days ago
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Another advantage of a price-weighted stock index is that it's easier to track with a real portfolio because they don't need to rebalance as frequently. To replicate the performance of the DJIA you just have to buy one share of each stock and hold them, you only need to place trades when a company is added or removed from the index. With a market cap weighted index you have to make more frequent trades every time a company does a buyback or issues new shares. |
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Not true for a price-weighted index. If there is a stock-split, the price will change as will the weighting. AAPL split in August 2020 4 for 1. It was 11% in the DJIA before the split - and close to $500 stock price. Post-split, all DJIA tracking funds had to sell AAPL as it probably went down to 2.5% weight. Consequently, all other stocks in the DJIA were to buy. Luckily, there aren't too many dollars tracking the DJIA.
> With a market cap weighted index you have to make more frequent trades every time a company does a buyback or issues new shares.
It depends. If the index is free-float market-cap weighting then yes, there will typically be a free-float adjustment at each rebalance (typically quarterly). But if there's no free-float adjustment then you need not do anything. Though managing a fund that tracks a free-float weighted index is not really an issue - there's some operational work to do on each rebalance.