S&P Dow Jones Indices launched a consultation in May 2023 proposing certain methodology changes to the S&P/BMV IPC with the overall goal of reducing single-stock concentration and simplifying rather complex eligibility and selection criteria.
After receiving feedback from market participants, a revised version of the proposal was approved in September 2023 and a two-phased implementation was announced starting with the March 2024 rebalance and concluding in June 2024 (see Exhibit 1 for a summary of the changes).
The main objective of these changes was to improve diversification by reducing stock concentration in the index. Exhibit 2 shows how the top five stocks represented about 53% of the index’s weight on average over the past five years and the impact of the first phase of the implementation during the March 2024 rebalance.
The decrease in concentration is achieved by reducing the weight caps for single stocks to 15% and the aggregate weight of the top five stocks to 45%. Additionally, a new rule to limit the weight of relatively illiquid stocks was introduced to address the potential for higher weightings of less liquid securities.
The additional changes in the eligibility and selection criteria were made in order to provide flexibility under different market conditions and to simplify the methodology.
Regarding the implementation, all changes except for the updated constituent weighting rules were implemented in full at the March 2024 rebalance. Changes to the constituent weighting caps will be implemented in two phases.
The first phase applied a 0.5 factor to the weight reduction of the capped stocks, with the resulting weight redistribution among the rest, for the March 2024 rebalance, with the intent of incorporating approximately half of the weight changes under the new rules (see Exhibit 3 for the new constituent weights in this first phase).
The final phase of implementation will be conducted at the June 2024 reweighting, where the changes in constituent weightings will go into full effect.
In summary, the methodology changes will contribute to improving diversification and flexibility in the S&P/BMV IPC, while at the same time, simplifying the methodology for the benefit of market participants.
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