We have said before that index funds rarely trade, which is mostly true. The obvious exception is when the index itself does a “reconstitution.”
These are usually done to move the index back closer to their stated objective – whether that means including just large-cap companies, or new shares of float for each company, or even allocating companies to style indexes based on their latest financial data. Usually, indexes make additions, deletions and a number of other changes in their reconstitutions.
When indexes change, index funds have to replicate the changes that the index makes at the same time, leading to sometimes very large trades.
Most indexes do these reconstitutions at regular times during the year. One of those days is this Friday – when Nasdaq, FTSE, S&P and Russell all have scheduled some changes.
Today, we focus on the Nasdaq-100 Index® (NDX), its changes tomorrow and throughout the years.
This year’s annual NDX reconstitution has 12 changes
The Nasdaq-100 Index conducts an annual reconstitution in December. This includes large new companies being added and smaller companies being deleted from the index.
This year, the Nasdaq-100 is welcoming six new companies, worth around $300 billion in total market cap. These six companies have grown in size over 50% over the past year, with some increasing over 100% (Chart 1). The smallest addition is a $48 billion company.
To keep the index at 100 companies, six existing companies will also be removed. Interestingly, the largest deletion (BIIB, at $27 billion in market cap), grew during the past year, but didn’t grow enough to hold its place in the index.
Chart 1: 2025 Additions and deletions by market cap change during the past 12 months and sector
Industry experts are currently estimating that the Nasdaq-100 reconstitution will lead to trading of around $50 billion tomorrow, resulting in over 11% two-way turnover in the index portfolio.
Some indexes add and delete during the year, too
Some indexes, notably those with “company counts” in their name, like the Nasdaq-100 and the S&P 500, also add and delete companies at ad-hoc times during the year.
The data below shows that the Nasdaq-100 sees quite a few additions and deletions outside of the December reconstitution (light green and light red from Chart 2).
Chart 2: NDX adds and deletes per year (light shade is ad-hoc; dark is reconstitution)
In fact, over the past 10 years, there have historically been around:
- Six official adds/deletes that took place in December.
- Three off-cycle adds/deletes per year.
That makes this year look pretty normal.
What causes an off-cycle add/delete?
Thanks to how the Nasdaq-100 Index methodology works, off-cycle additions in the Nasdaq-100 are generally caused by off-cycle deletions. The key exception would be securities that are added to the index as a result of a corporate action (such as a spin-off).
The criteria that could lead to security removal includes:
- Delisting, liquidating, or ceasing operations.
- Transferring to another exchange (other than Nasdaq).
- Reclassifying as a non-eligible security type or reclassifying as a ‘Financial’ company (according to ICB classifications).
- Failing to maintain a weight of at least 0.10% for two consecutive months.
If a security is deleted (with the exception of spin-offs), it will be replaced with another Nasdaq-listed security. The security with the largest market capitalization, which meets all other eligibility criteria, will replace the deleted company.
For example, the table below outlines some of the recent off-cycle adds and deletes, and the reasons they occurred:
Table 1: Recent off-cycle adds/deletes
How much trading do index changes cause?
Apart from special rebalances, annual reconstitutions (dark green below) tend to be the largest driver of index turnover. Chart 3 below highlights the two-way turnover (buys and sells) for ad-hoc additions/deletions (light green), quarterly rebalances (gray), annual reconstitutions (dark green), and special rebalances (gold).
Because ad-hoc deletions are typically smaller in size, the resulting turnover from buying ad-hoc adds and selling ad-hoc deletes, throughout the whole year, tends to be lower than the trading done for the reconstitution.
Chart 3: NDX turnover historically – due to reconstitution, ad-hoc changes and other rebalances
Although ad-hoc changes generally result in low levels of turnover, they have caused some higher turnover events (labeled light green dots), such as when:
Overall, we estimate that ad-hoc adds/deletes typically result in less than 1% two-way turnover, approximately the same as a typical share change rebalance.
What does this all mean?
Indexes (like the Nasdaq-100) follow a systematic set of rules.
Most indexes need to make regular changes, so they better follow their index objective.
Corporate events can also cause changes, and result in additions and deletions taking place outside of the annual scheduled reconstitution. Although, as we learned today, off-cycle changes are relatively small and, typically, result in low levels of turnover.
However, tomorrow is a significant trading day for index portfolio managers, especially those tracking the Nasdaq-100.
