I believe in the importance of rebalancing a portfolio back to target allocations each year. But how many indexes follow this advice?
Market cap-weighted indexes, for example, may add and remove companies each year, but as they are weighted based on market capitalization, they would not necessarily be sensitive to potential changes in the relationship between share price and fundamental value.
At WisdomTree, we rebalance our Indexes annually based on changes in relative value. For our Global and Emerging Market Indexes, this occurs in June. Some of the largest changes at this year’s global rebalance occurred in our Emerging Market Indexes, specifically the WisdomTree Emerging Markets Equity Income Index. An apt illustration of the relative value of a rebalance can be seen through an analysis of the top 10 added and deleted constituents for this Index.
-The top 10 additions to the WTEMHY had an average price-to-earnings (P/E) ratio of about 5x while the top 10 deletions had average P/E ratio of over 15x.