What does 'free-float adjusted' mean for indices?

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AcadiFi · Accepted Answer

Free-float adjustment modifies cap-weighting by using only shares that are publicly tradable rather than total shares outstanding. Shares held by founders, governments, ESOPs, cross-shareholdings, or held for control are excluded. This better reflects the actual supply investors can buy and reduces the mechanical tracking error for index funds. Example: Solastere Energy has 800M shares outstanding at €45. A state-owned sovereign fund holds 30%, the founding family holds 12%, and another 4% sits in a long-term employee trust — total 46% non-float. Free float = 54%. Full market cap = €36.0B. Free-float market cap = €19.44B. In a free-float index, Solastere contributes €19.44B to aggregate cap, not €36.0B. MSCI and FTSE use inclusion 'bands' — e.g., a stock with 48% free-float is assigned a factor of 0.50 and 52% weight is excluded. The practical effect: state-controlled or founder-dominated firms (Saudi Aramco, Alibaba in early days, LVMH family stake) receive less index weight than their full caps imply, making index funds easier to replicate. For analysts, comparing full-cap to free-float-cap reveals concentration risk and potential for forced selling if insiders distribute shares (e.g., lockup expiries often lead to free-float increases and upward weight adjustments).

What does 'free-float adjusted' mean for indices?

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