S&P Dow Jones Indices Revamps Growth/Value Classification Rules, Over $375 Billion in Passive Funds Face Rebalancing
nashnova research
S&P Dow Jones Indices will rewrite its growth-versus-value classification rules effective December 21, forcing at least $375 billion in passive funds to reshuffle holdings — one of the broadest index-methodology changes in recent years.
What exactly is changing?
The new rules add intangible assets, forward earnings, and free cash flow to the factor framework that measures whether a stock looks cheap or expensive.
At the same time, 12-month price momentum is removed from the criteria for gauging growth potential.
This means → the index will no longer rely solely on book values to sort stocks into "growth" or "value" — invisible assets like patents and brands now count.
Why did the old rules stop working?
Accounting standards typically book R&D spending as an expense, not an asset — making IP-heavy companies look "overpriced" under traditional metrics.
In plain terms = a company that spends heavily on research ends up with a worse-looking balance sheet, so the traditional price-to-book ratio (valuing a company by its net book assets) pushes it out of value indices.
Researchers and fund managers have long argued that value stocks underperformed partly because the yardstick itself was flawed, not because the value strategy failed.
How does $375 billion move?
Bloomberg Intelligence analyst James Seyffart estimates passive funds linked to the affected indices total at least $375 billion.
Once the new rules take effect on December 21, these funds must rebalance — some stocks currently in growth indices may shift into value indices, and vice versa.
This means → around the rebalancing date, affected constituents could face non-fundamental buying and selling pressure.
Is it just S&P — or is FTSE Russell moving too?
FTSE Russell is reviewing its benchmark practice of splitting stocks 50/50 between growth and value, with consultations closing December 11.
The backdrop: tech mega-caps keep growing their market dominance, making the traditional even split increasingly unrealistic.
This reflects a broader questioning across both major index providers of whether the classic "growth vs. value" framework can still meaningfully describe today's market structure.
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