It's the index adjustment day again. What changes have occurred in valuation?
In June, it's the rebalancing day for the index constituent stocks.
In the valuation table, most indices will rebalance the stocks they hold 1 to 2 times a year.
For indices like the Shanghai and CSI series, rebalancing typically occurs in June and December, with the rebalancing date being the day after the second Friday of the month.
At the end of May, the CSI Index Company issued the regular rebalancing announcement for the indices in June.Let's also take a look at the impact of the portfolio adjustment in June 2023 on the index we have invested in.
Basic Concept of Index Rebalancing
What is index rebalancing?
Indexes have certain rules for stock selection and requirements for the number of stocks selected. For example, the CSI 300 Index selects the 300 largest stocks. However, throughout the year, as stocks fluctuate, some stocks may decrease in size and no longer meet the top 300 criteria, while others may increase in size and newly enter the top 300.So, every once in a while, the index will rebalance its portfolio to reconfigure itself with new stocks.
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When does the rebalancing take place?
For series of indices such as the CSI, each rebalancing typically occurs after the second Friday of June and December.
Different indices may have different rebalancing frequencies.
For instance, the CSI 300 and the CSI 500 indices rebalance once in June and December. The related 300 Value and 500 Low Volatility indices follow the same pattern.However, indices like the CSI Dividend and SSE Dividend Index are rebalanced in December each year and do not participate in rebalancing in June.
Impact of Index Rebalancing on Fund Net Asset Value
▼Will rebalancing cause changes in the net asset value of index funds?
Rebalancing is usually completed in a relatively short period of time. Index funds first sell the stocks that are removed from the index and then buy the stocks that are added to the index.
This process will not cause significant changes in the fund's net asset value.However, because the constituent stocks have changed, the valuation of the index will still fluctuate.
What do we need to do for rebalancing?
We don't need to do anything for index rebalancing. It is the job of the index fund manager, which is completed in the background of the fund company. We just need to continue to hold the fund patiently.
What impact will this rebalancing have on the index valuation?
Impact on market capitalization-weighted indicesLet's first examine the impact of this rebalancing on the valuation of market-cap-weighted indices such as the CSI 300 and the CSI 500.
**CSI 300 Index**
The CSI 300 Index has adjusted 9 of its constituent stocks in this rebalancing:
- The stocks that were removed have an average P/E (Price-to-Earnings) ratio of around 25.53 times, and an average P/B (Price-to-Book) ratio of around 2.9 times;
- The stocks that were added have an average P/E ratio of around 10.83 times, and an average P/B ratio of around 1.62 times.Overall, in this portfolio adjustment, the price-to-earnings (P/E) ratio of the CSI 300 Index has decreased, and the price-to-book (P/B) ratio has slightly declined.
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**CSI 500 Index**
For the CSI 500 Index, this adjustment involved replacing 50 constituent stocks:
- The stocks that were removed had an average P/E ratio of around 17.93 times, and an average P/B ratio of around 1.2 times;
- The stocks that were added had an average P/E ratio of around 24.61 times, and an average P/B ratio of around 3.3 times.
After this adjustment, both the P/E and P/B ratios of the CSI 500 Index will be somewhat higher than before.Some friends have asked, is it always the case that during each portfolio adjustment, the valuation of the CSI 300 decreases while the valuation of the CSI 500 increases?
This is not necessarily the case. In previous adjustments, there have been instances where the valuation of the 300 increased and the valuation of the 500 decreased.
**CSI 1000 Index**
The CSI 1000 represents the small-cap stock index. This time, 100 constituent stocks were changed during the portfolio adjustment:
- The stocks that were removed had an average price-to-earnings (P/E) ratio of around 22.49 times, and an average price-to-book (P/B) ratio of around 1.91 times;
- The stocks that were added had an average P/E ratio of around 24.32 times, and an average P/B ratio of around 2.34 times.After the rebalancing of the CSI 1000, the valuation will be slightly increased.
Impact on strategic indices
The above introduction pertains to the common valuation changes of the Shanghai-Shenzhen 300, CSI 500, and CSI 1000.
There are also some strategic indices.
▼300 Value IndexThe index of the value series takes into account "low price-to-earnings ratio, low price-to-book ratio, low price-to-cash flow ratio, and high dividend yield" to select stocks.
Generally speaking, the 300 Value Index selects stocks with lower valuations, and with each rebalancing, the valuation is likely to decrease significantly.
In this rebalancing, the price-to-earnings ratio has also decreased.
The 300 Value Index has adjusted five constituent stocks this time:
- The stocks that were removed have an average price-to-earnings ratio of around 19.95 times, and an average price-to-book ratio of around 1.25 times;
- The stocks that were added have an average price-to-earnings ratio of around 5.65 times, and an average price-to-book ratio of around 1.48 times.▼500 Low Volatility Index
The 500 Low Volatility Index consists of the 150 least volatile stocks selected from the 500 Index. Volatility does not have a direct correlation with valuation; therefore, adjustments to the 500 Low Volatility Index may lead to increases or decreases in valuation.
This time, the 500 Low Volatility Index has adjusted 38 constituent stocks:
• The stocks that were removed have an average P/E ratio of around 20 times, and an average P/B ratio of around 1.42 times;
• The stocks that were added have an average P/E ratio of around 14.48 times, and an average P/B ratio of around 1.39 times.After this 500 low-volatility rebalancing, the valuation will also be slightly reduced.
Currently, only the rebalancing list of the index has been announced, and the specific effective time is after the market closes on the second Friday of June (June 9th).
The above data is calculated based on the closing on this Tuesday, but the actual changes will only be known after the market closes on this Friday.
The current index fund still consists of the components before the rebalancing.
Once it takes effect, next week everyone will see the adjusted valuation.
SummaryOverall, this regular portfolio rebalancing has had varying impacts on the valuations of different indices:
- The valuations of indices such as the CSI 300, 300 Value, and 500 Low Volatility have decreased;
- The valuations of the CSI 500 and CSI 1000 have slightly increased, but they are still undervalued after the rebalancing.
Before and after the rebalancing, the valuation status of the indices has not changed, and it does not significantly affect our investments.
We also do not need to take any additional actions regarding the index rebalancing; this is completed by the fund managers in the background.
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