Index Methodology Review: Deep Dive Into Rebalancing and Weighting Methods

This presentation examines how the monthly reconstitution of Bloomberg benchmarks creates distinct market dynamics for securities entering and exiting flagship indices. It analyzes the relative performance and characteristics of newly issued bonds, rating-driven inclusions, and the various forms of exits—whether due to maturities rolling below one year, downgrades, defaults, or liquidity constraints—tracking outcomes from the announcement date through to effective inclusion or removal. The analysis also highlights the behavior of indices rebalanced at higher frequencies.

The second part of the presentation focuses on the market value weighting methodology used in fixed income benchmarks. It considers whether this approach, by allocating more weight to the most indebted issuers, may inadvertently tilt portfolios toward weaker fundamentals and thus impair performance. Finally, the discussion explores the merits of alternative index construction methods—including equal weighting, capped weighting, fundamental weighting, and credit-risk-based approaches.