How do index funds adjust market capitalization and what are the tax consequences?

[Anonymous]

The stocks in an index fund such as the S&P500 are weighted according to company market capitalization. How are the stock holdings adjusted for changing market capitalization, how often are the holdings adjusted, and what are the capital gains and other tax consequences?

[Anonymous]

Anonymous wrote:The stocks in an index fund such as the S&P500 are weighted according to company market capitalization. How are the stock holdings adjusted for changing market capitalization, how often are the holdings adjusted, and what are the capital gains and other tax consequences?

Market cap will not need any adjustment. If a stock say like Google has gone from 0.2% of the S&P500 in the last 20 years to 1% now, that's almost entirely because it has outperformed the larger S&P500 by a factor of 5, which means that the stock holdings from 20 years ago are now worth 5 times as much (plus the overall S&P increase). So no need for the fund to buy more Google stock- it's holdings from 20 years ago have appreciated a lot and now take up the much larger percentage of the holdings.

The only major adjustments will be as stocks fall out of or into the index, but those are generally going to be much smaller holdings as a percentage of the index, because by definition they are the smallest cap stocks. Some discussion here.

https://www.bogleheads.org/forum/viewtopic.php?t=326013

[Anonymous]

Very helpful. Thank you.