It's that time again when investors find out whether their ASX shares have made it into various indices, such as the S&P/ASX 200 Index (ASX: XJO), or if they have been booted out.
The event holds significance as it can often have implications for the share prices of companies. Usually, the addition to an index indicates a company has been performing. Meanwhile, removal often follows a period of disappointment.
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What is index rebalancing?
There are various indices in the Australian share market that are based on either market capitalisation or sector. For many investors, the ASX 200 is the most popular cross-section of ASX shares, which is comprised of the 200 largest companies on the ASX.
The major indices, such as the ASX 200, 100, 50, and 20, are rebalanced quarterly. On the third Friday of March, June, September, and December, any changes in the indices are enacted.
This month we will see some notable changes in how the market looks. For example, we will witness the removal of Brambles Limited (ASX: BXB) and Block Inc (ASX: SQ2) from the ASX 20.
In their place will be James Hardie Industries PLC (ASX: JHX) and Santos Ltd (ASX: STO).
Why do ASX shares undergo rebalancing?
In short, indices are regularly rebalanced in an attempt to accurately reflect an accurate representation of the broader equity market.
Throughout the quarter, some companies grow and others shrink. In turn, the constructors of the index need to make modifications to mirror these changes.
As an example, Mesoblast Limited (ASX: MSB) has fallen 37% in the last three months, while AVZ Minerals Ltd (ASX: AVZ) has rallied 63%. These major alterations in market capitalisation call for Mesoblast to be removed and AVZ to be added.
When is the next one?
The decision for which ASX shares to be added and removed for March has already been made. Investors can expect to see the adjustments officially made on 22 March.
However, for those keen shareholders looking forward, the next rebalance will take place on 17 June. The question is: which ASX shares will be shuffled around next quarter?
