In our paper, Why Float-Adjusted and Scaled Index?, we examine how index design choices can influence investability, diversification and long-term implementation. While indices are often treated as neutral representations of “the market”, the way they are constructed has practical implications for portfolios.
Most equity indices weight companies by market capitalisation, meaning the larger the company, the larger its weight. However, not all shares or bonds are freely available to trade. In addition, following extended periods of strong performance, a small number of very large companies can come to represent a significant proportion of an index. Both factors can affect how exposure is distributed and how easily an index can be replicated in practice.
Free float refers to the proportion of securities that are realistically available in the public market. Where shares are held by founders, governments or long-term strategic investors, they may not form part of the effective tradable supply. A float-adjusted index accounts for this by weighting companies based on the shares that are actually available to investors. This helps ensure index weights reflect the investable market opportunity set rather than the total legal share count.
Even with float adjustment, concentration can still build. Scaling, or capping, is a rules-based mechanism that limits how large individual companies or groups of companies can become within the index. It does not involve discretionary stock selection. Instead, it applies a transparent methodology at scheduled review points to help manage concentration risk within a market-based framework.
Together, float adjustment and scaling are structural design choices intended to support investability, efficient implementation and broad diversification. They do not change overall market exposure, but they can shape how that exposure is distributed within a portfolio.
To explore the rationale and mechanics in more detail, you can download the full paper below:
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