Index rebalance
A scheduled change to an index's constituents or weights, which forces funds tracking the index to buy and sell.
An index rebalance is a scheduled change to which stocks are in an index or how much weight each receives. Index providers publish their rules. The S&P 500 committee also adds and removes companies between scheduled reviews. Funds that track the index must trade to match the new weights, often at the close on the effective date.
On our site, rebalances are listed with effective dates and the companies affected. Expected additions and deletions are often reported before they are announced; treat them as estimates until confirmed.
Traders care because the closing auction on the effective date can see very large volume in the names being added and removed. Prices often move before the effective date and can reverse afterward.
Worked example (illustrative numbers, not real data): an index-tracking fund manages 10 billion dollars and will hold 2 percent of a stock being added to the index. It must buy 200 million dollars of the stock at the close on the effective date. If the stock's daily dollar volume is 400 million, that buy is half a day's trading.