Capped Index

What Is a Capped Index?

A capped index is a equity index that has an upper limit on the weight of any single security. Hence, a capped index sets a maximum percentage on the relative weighting of a component not entirely settled by its market capitalization, even assuming that that company normally conveys a greater weight in the market. The reasoning behind a capped index is to prevent any single security from applying an unbalanced influence on an index.

Grasping Capped Indexes

In the event that a market index turns out to be too gathered in a small modest bunch of stocks, it can distort the diversification benefits of a broad index and lead to the index being driven as a rule by those exceptionally large components. Setting up a cap limits this influence, by ordering that, say, something like 10% of the index be weighted to any single company no matter what its true size.

A capped indexes utilize market capitalization to figure out where every constituent in the index is weighted by its free float-adjusted market capitalization. Applying free float-adjusted market capitalization weighting might bring about certain cases in large sector, geographical or company concentration. Capped indexes are much of the time considered an option in contrast to purely free float-adjusted market capitalization weighted indices by obliging the maximum sector, geographical or constituent weights. This is a self-rebalancing methodology, in that as a company's price or outstanding share quantity changes, so do the extents of stocks in the index.

One detriment of a cap-weighted index is that it doesn't necessarily precisely mirror the manner in which markets really act: Larger companies do, truth be told, have greater influence on the overall market than smaller companies. Market cap-weighted schemes aren't perfect. Some of the time companies have shares that aren't completely accessible for trade on the open market, (for example, government-held shares, or large secretly controlled holdings). In such cases, pure cap-weighted schemes would distort the genuine investable market cap accessible.

Capped Index Guidelines

In certain examples, the calculation of the constituent capping factors depend on prices at market close on the second Friday of the survey month, involving shares in issue and investability weights as designated to produce results after close on the third Friday of the audit month (for example producing results on the survey effective date).

Calculation of capping factors ought to make into account any corporate moves/events that produce results after close on the second Friday of the survey month up to and including the audit effective date, assuming they have been announced and confirmed constantly Friday of the audit month.

Corporate activities and events announced after the second Friday of the survey month that become effective up and including the audit effective date won't bring about any further adjustment.

Illustration of a Capped Index

For instance, in Canada, the S&P/TSX Capped Composite index that is kept up with by Standard and Poor's confines the weighting of any component to a maximum of 10 percent, no matter what its market capitalization. The S&P/TSX Capped Composite index was presented in 2002, subsequent to the rise and fall of Nortel Networks, which at its pinnacle accounted for close to one-third of the total market capitalization of all stocks on the former TSX-300 index.

Features

• A capped index prevents exceptionally large companies from applying an excessively large influence on the index as they become greater and greater.
• A capped index puts a limit on the weight of any single security in an equity index.
• Frequently, the weight of every component will be founded on its float-adjusted market cap, however is modified with the end goal that no stock has a weight more than X% of the whole index.