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The Money Maze TMM Nº 023

JSE Index Changes and Rebalancing: How the Top 40 Is Picked

6 min

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JSE index changes explained: how FTSE/JSE Top 40 constituents are chosen, quarterly reviews, rebalancing, weighting methods and what it means for ETFs.

Show notes

Why do some shares get kicked out of the Top 40 like a rowdy oke at a wedding? Who decides who gets invited back in? And what’s this “weighting” that has nothing to do with your boep? Here’s how JSE index changes and rebalancing work.

By The Money Maze | Listen to the episode: Spotify

If you own a Top 40 ETF, you own whatever the index says you own. So it’s worth knowing who writes the guest list, and how often they change it.

Who runs JSE indices?

The main South African share indices are the FTSE/JSE Africa Index Series, run jointly by the JSE and FTSE Russell. They publish detailed ground rules: a rulebook for how companies get in, get out and get weighted. The FTSE/JSE All Share Index covers most of the market by value. The Top 40 is the 40 largest companies within the All Share.

How the Top 40 is picked

Think of the Top 40 as a VIP club in Sandton. To get in, companies need to tick a few boxes:

  • Size: companies are ranked by investable market capitalisation, which adjusts for free float.
  • Free float: the share of a company’s stock that’s actually available to trade. If most shares are locked up by a founder or a strategic holder, a smaller portion counts.
  • Liquidity: shares must actually trade enough. If it’s drier than your uncle’s braai chops, it may not qualify.

Note what’s not on the list: the Top 40 doesn’t try to balance sectors. If the biggest companies are miners, the index is miner-heavy. That’s a feature, not a bug.

Quarterly reviews: report card season

FTSE/JSE indices are reviewed every quarter, in March, June, September and December. Changes take effect after the third Friday of the review month, from the Monday. To stop companies bouncing in and out every quarter, the rules use buffers: a company ranked just outside the Top 40 needs to climb clearly into it before it’s added, and an existing member has to fall clearly out before it’s removed.

Free float figures are also updated at the reviews.

Rebalancing: rearranging the furniture

When the index changes, every fund tracking it has to follow. That means:

  • Forced buying of companies added to the index.
  • Forced selling of companies dropped.
  • Weight adjustments for everything else.

That’s why index inclusion can give a share a short-term lift, and exclusion a short-term knock, with nothing changing in the actual business. It’s passive money following rules. Trading activity spikes around review dates, especially at the close on the effective day. Index funds want to trade at the closing price, because that’s the price the index uses. So the closing auction on rebalancing Friday can see enormous volumes in shares that normally trade quietly. Professional traders know this and position ahead of it, which is one reason added shares often rise before the change even takes effect.

For ETF investors, rebalancing comes with small trading costs inside the fund and occasionally tracking error. You won’t usually notice it, but it’s there, which is why a tracker never matches its index exactly.

Weighting methods: not all shares are equal

Once a company is in the index, how much does it count?

  • Free-float market cap weighting: bigger companies, by investable value, count more. This is the standard for most FTSE/JSE indices. If a heavyweight sneezes, the whole index catches flu.
  • Capped weighting: the same, but with a ceiling on individual shares so one giant can’t dominate. There are capped versions of JSE indices for this reason.
  • Equal weighting: every share gets the same slice. Fairer-looking, but you end up with more small companies and more trading.
  • Fundamental or factor weighting: weights based on dividends, earnings or other factors. Several South African smart-beta ETFs use these.
  • Price weighting: based on share price alone. Famously used by the Dow in the US, not by the main JSE indices.

A worked example of an index shuffle

Say a pharmaceutical company has a rough year and its market value drops below the cut-off, while a retailer has been climbing as shoppers chase specials. At the next quarterly review, the retailer may join the Top 40 and the pharma company may drop out. Top 40 trackers then have to sell one and buy the other on the same day.

The retailer can rally on the news, and the pharma company can slide, without either business changing at all.

Why it matters to you

  • Exposure: know what your ETF actually holds and how concentrated it is.
  • Risk: a cap-weighted index can be dominated by a handful of names. Check the top ten holdings.
  • Returns: when the heavyweights move, your fund moves with them.
  • Stock pickers: knowing which companies sit near the cut-off can explain sudden price moves around review dates.

Stokvel Starter Pack

  • Index constituent: a company that’s currently in an index. Picked for the squad.
  • Quarterly review: March, June, September and December.
  • Rebalancing: adding, removing and reweighting index members.
  • Free float: shares actually available to trade.
  • Weighting methodology: the formula for how much each company counts.
  • Capped index: an index with a ceiling on any single share’s weight.

Takeaway: Passive investing still follows rules made by someone. Know the rules, and you’ll understand what your ETF is doing when nobody’s looking.

Want the full braai version? Listen on Spotify. And if you’d like the Maze in your inbox, join the free Maze Mail list.

More from The Money Maze

Sources

  1. FTSE/JSE Africa Index Series ground rules v9.1, JSE and FTSE Russell.
  2. FTSE/JSE Africa Index Series ground rules v8.8, JSE and FTSE Russell, Mar 2025.

This is not financial advice.

Transcript

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0:00 Welcome back to the money money start podcasts for South African retail investors want to stop feeling like they're drowning in jargon and start navigating the market like someone who actually knows what they're doing on your host Jay. And today we're going full show calendar on the JC. Why do some shares get kicked out of the Top 40 like a drunk or could a wedding? Who decides which she is getting lighter back in? And what exactly is this waiting that has nothing to do with Jim Oyo book?

0:30 Let's dive in. Talk to the Top 40 index like a VIP club in Santon. Not everyone gets in. To make the cut, a company must take a few boxes. Free float. Adjusted market cap. Not just size, but size that actually available to trade. If most of your shares are locked up by a billionaire who never sells, the JSMI isn't all that impressed.

0:56 Liquidity. They check how often the shares trades. If it's drier then your uncle's bride chops it's out. Sector representation. The JSE doesn't want the Top 40 to be 37 mining shares and one lonely bank, so they tried to keep some balance. Now these rankings are reviewed quarterly, usually in March, June, September and December. It's like School Report season, except instead of getting grounded, companies get kicked out of the index and then rebalancing.

1:31 This is when the JSE rearranges the furniture. So when the JV balances an index, it updates which companies are in and which are out based on those same metrics. Free float, market liquidity and all that jazz. So let's say Shopright has a massive year and suddenly it's worth more than half of the companies on the Top 40. Come rebalancing season, Shop Right could get bumped up into the index, and someone like Hammerson or Mr. Price might get the chop. But why does it matter to you, dear Easy Equities warrior? Because if you've invested in an ETF like the Citrix Top 40, that ETF must mirror the index.

2:13 So when the index changes, the ETF provider has to buy and sell accordingly. That could cause increased trading costs, sometimes taxable events and in some cases nice little price jump if the stock gets added thanks to all that forced ETF buying. So in short, index changes don't just affect fund managers, they reach you a little 500 Rand investment too. Now let's get a little bit more spicy and do another look at Whiting methodologies.

2:47 Let's say there are two companies in the index, not Spanish and SPA. Both are in, but are they treated equally? Nope, because most Chinese indices are market cap weighted. Naspers carries the weight of a sumo wrestler and Spa is more like a featherweight boxer. That means if nice about sneezes, your ETF might catch a flu. It has a disproportionate influence on the performance of the whole index.

3:15 There are other waiting methods too. Equal weighting. All shares get the same weighting, which sounds fair but messes with the whole point of tracking the biggest players. Fundamental waiting uses things like earnings or dividends to assign weights. Price weighting based on share price alone. Not really used on a jazz it's more of a US thing but for the average South African etfinvestor you usually dealing with a free float market cap weighting.

3:45 Let's do a quick real life example of a Top 40 shuffle. Let's say Aspen's price tanks because they made a vaccine that no one wanted. They fallout of the Top 40 replacing them is let's say Pepco, which has been climbing thanks to all of our surviving on specials ETF managers. You'll have to sell aspirin and buy pipcorn. This 4th buying can push pic course price up, creating a short term rally That has nothing to do with fundamentals, just passive money chasing index rules.

4:17 So why should you care? Well, here's the big take away if you own ETFs that track JSE indices. Index changes and waiting matter more than your sink. They affect what companies you're exposed to, the risk profile in your investment, how your returns behave, especially when the big dogs bark and if you are stuck because knowing which companies are about to enter or leave an index can give you cheeky hit start like spotting woolies marking down hot cross buns just before Easter.

4:49 So after all of this led to a quick recap with your stock sell starter pack of stock lingo for this volume 2023. Wrapping up, the minimised way index constituent that companies that are currently part of an index, like the Jazz Top 40 like being picked for the Springbok squad but with less running involved. Rebalancing.

5:11 That's when the index gets a makeover and companies are added or removed based on new data. Waiting methodology. This is the formula used to decide how much influence each company has on the index's performance. Most JC indices use free float market cap weighting. And while my jokes may be more dad than actual jokes, Please remember this is not financial advice.

5:35 Please do your own research and speak to a licensed advisor. I'll catch you next time when we decode what actually makes your company a blue chip and whether it's worth collecting them like you collect spur sauce bottles.

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