We said earlier that index funds rarely trade, which is mostly Truth. The obvious exception is when the index “reconstitutes” itself.
These are typically done to move the indices closer to their stated objective – whether that means including just large-cap companies, or adding new shares of the float to each company, or even allocating companies to a styled index based on their latest financial data. Typically, indexes make additions, deletions, and many other changes in their reconstitution.
When indexes change, the index fund has to replicate the changes that the index makes at the same time, sometimes leading to very large trades.
Most indices perform these reconstitutions at regular times during the year. one of those days this Friday – When Nasdaq, FTSE, S&P and Russell have all scheduled some changes.
Today, our focus is on the Nasdaq-100 Index® (NDX), it changes tomorrow and throughout the year.
There are 12 changes in this year’s annual NDX restructuring
The Nasdaq-100 index holds an annual reconstitution in December. This includes the inclusion of large new companies and the removal of smaller companies from the index.
This year, the Nasdaq-100 is welcoming six new companies, with a total market capitalization of nearly $300 billion. These six companies have increased in size by more than 50% in the past year, with some increasing by more than 100% (Chart 1). The smallest increase is a $48 billion company.
Six existing companies will also be removed to keep the index at 100 companies. Interestingly, the largest deletion (BIIB, $27 billion in market capitalization) grew over the past year, but not enough to retain its place in the index.
Chart 1: Additions and deletions by market cap change over the last 12 months and sector to 2025
Industry experts are currently estimating that the Nasdaq-100 realignment will result in approximately $50 billion of trading tomorrow, resulting in a two-way turnover of more than 11% of the index portfolio.
Some indexes also add and remove during the year
Some indices, particularly those with “company count” in their names, such as the Nasdaq-100 and S&P 500, also add and remove companies at ad hoc times during the year.
The data below shows that there have been quite a few additions and deletions to the Nasdaq-100 outside of the December realignment (light green and light red from Chart 2).
Chart 2: NDX adds and deletions per year (light shade is ad-hoc; dark is reorganization)
In fact, over the last 10 years, historically there have been around:
- Six official additions/deletions occurred in December.
- Add/remove three off-cycles per year.
This makes this year seem quite normal.
What is the reason for off-cycle addition/removal?
Thanks to how the Nasdaq-100 index methodology works, off-cycle additions to the Nasdaq-100 are typically caused by off-cycle deletions. The main exception would be securities that are added to the index as a result of a corporate action (such as a spin-off).
Criteria that may cause protection to be removed include:
- Delisting, liquidation, or ceasing operations.
- Transfer to another exchange (other than Nasdaq).
- Reclassifying as a non-qualified security type or reclassifying as a ‘financial’ company (as per ICB classification).
- Failure to maintain at least 0.10% weight gain for two consecutive months.
If a security is removed (with the exception of a spin-off), it will be replaced by another Nasdaq-listed security. The security with the largest market capitalization, which meets all other eligibility criteria, will take the place of the delisted company.
For example, the table below outlines some recent off-cycle additions and removals, and the reasons for their occurrence:
Table 1: Recently added/removed off-cycle
How much trading is caused by index changes?
Apart from special rebalancing, the annual reconstitution (dark green below) is the largest driver of index turnover. Chart 3 below highlights two-way trades (buys and sells) for ad-hoc additions/deletions (light green), quarterly rebalancing (gray), annual rebalancing (dark green), and special rebalancing (gold).
Because ad hoc deletions are usually small in size, the turnover from buying ad hoc additions and selling ad hoc deletions during the entire year is less than the turnover for restructuring.
Chart 3: NDX turnover historically – due to restructuring, ad hoc changes and other rebalancing
Although ad hoc changes generally result in low turnover levels, they have caused some high turnover events (labeled light green dots), such as when:
Overall, we estimate that ad-hoc additions/deletions typically result in two-way turnover of less than 1%, roughly the same as a typical share change rebalancing.
What does all this mean?
Indices (like the NASDAQ-100) follow a systematic set of rules.
Most indices require regular changes so they better adhere to their index purpose.
Corporate events may also cause changes, and may result in additions and deletions occurring outside of the annual scheduled reorganization. However, as we learned today, off-cycle changes are relatively small and, typically, result in low levels of turnover.
However, tomorrow marks an important trading day for index portfolio managers, especially those tracking the Nasdaq-100.
