Quarterly index review to lift JSE equities volumes

March 15, 2013 at 8:12 AM EDT

Johannesburg, 14 March 2013 – Market watchers can expect to see large trading volumes on the JSE's equity market tomorrow as a methodology change to the FTSE/JSE Africa Index Series is implemented. This change will impact all investments that track an index including unit trusts, exchange traded funds, institutional funds as well as index derivatives products. 

The indices will now be constructed according to an actual free float instead of a banded free float methodology. "While the JSE's quarterly index review does not typically have a large impact, this quarter's changes should see a spike in trading volumes due to a substantially larger than usual turnover in portfolio positions," says Dr Jannie Immelman, Head of Information Services at the JSE. For example, the JSE's quarterly index review normally creates a portfolio churn of around 0.9% for FTSE/JSE Top 40 Index trackers, while this review is forecasted to result in a churn of 5.8% - nearly 6.5 times larger than normal. 

The change in index construction from a banded to an actual free float methodology is in line with a global index methodology change applied by FTSE. While the banded structure worked well over the past 10 years, as an unintended consequence a relatively small change in the free float of a company could result in a significant move between bands. These large moves had the potential to cause a short-term liquidity squeeze. The new methodology will measure actual free float rounded up to the next 1%. Furthermore, a 3% buffer will apply, which means that the free float figure for a constituent will only be adjusted if the move in free float is larger than 3%.

"This change will improve the market representation of the indices and potentially reduce large changes to constituent weights. An additional advantage is that free float data available to investors will be significantly more precise," says Immelman.