Index Trades and Mower Blades

Home ownership quickly taught me which yard maintenance tasks can be tackled infrequently. Pruning the oak trees? Fertilizing the lawn? Once or twice a year will suffice. Mowing the lawn? Do that once a year and you’ll find the only thing waist-high grass damages more than your lawnmower is your relationship with the neighbors. 
 
Index fund trading occurs on a tree trimming-like schedule, mostly during a few reconstitution events scheduled for arbitrary points on the calendar. For Russell indices, such as the Russell 1000 Value Index, these composition changes occur on the fourth Friday of each June. Over the past five years, the Russell 1000 Value’s reconstitution day turnover has been between 12% and 17%.¹ Concentrated turnover causes portfolio characteristics to drift from the intended objective. Based on these turnover levels, managers tracking the index were investing between 1/8th and 1/5th of their cash flows into stocks no longer considered large value by Russell.  
 
An investment process with the flexibility to rebalance continuously through time can maintain asset class exposures more consistently, potentially capturing premiums more reliably and potentially avoiding unnecessary costs. In the same way, regular lawn maintenance helps me avoid an intractable mess in my yard.