The Market Cap Rebalancing Method: A Focus on Liquid Asset Allocation

Aelium
3 min readFeb 1, 2024

The Market Cap Rebalancing Method is more than a mere strategy — it’s a reflection of tried-and-true market best practices: an approach adopted by sophisticated investors who seek to maintain realistic equity by investing in liquid assets.

To each asset it assigns a weight that is directly proportional to its market capitalization: this methodical allocation is designed to mirror the top-n asset’s relative size and importance in the broader market, thereby aligning our portfolio’s composition with the current market landscape.

This method ensures that the portfolio is not only reflective of the market’s largest players but also resilient in terms of value retention during market fluctuations.

Here’s an exploration of this standard through Aelium’s capabilities.

Setting the Stage with MarketCap Portfolio Configuration

The cornerstone of the MarketCap portfolio is its configuration that prioritizes assets with higher liquidity. By focusing on the top-N assets by market capitalization, it ensures that investments are allocated to assets that are likely to maintain value during a rebalancing phase. When creating a new portfolio, simply choose the Market Cap rebalancing method and the number of top-n assets to consider.

Portfolio Configuration: “Market Cap” rebalancing Method

A Closer Look at Market Dynamics through Performance Analysis

The Performance Analysis graph provided by the Aelium platform offers a clear depiction of the portfolio’s behavior over time (white line), demonstrating solid growth when compared with the buy and hold strategy (grey line). The focus here is on the stability and realistic equity value of the assets chosen based on market cap, as this strategy inherently selects for liquidity and market representation.

With Aelium it is also possible to connect a custom predictive AI model to the portfolio in order to incorporate price forecasts into the asset weight assignment algorithm. In this way it is possible to further improve the performance of the portfolio in terms of yield and stability; this will be the subject of a future blogpost.

Market Cap rebalancing backtesting for the chosen assets

Automation: The Key to Consistent Rebalancing

Automation is a critical feature of the Market Cap Rebalancing Method, ensuring that the portfolio stays up-to-date with the latest market capitalizations. Scheduled rebalancing events on the Aelium platform are programmed to automatically adjust the asset allocations periodically by connecting to an exchange account of choice. This ensures that the portfolio consistently reflects a focus on liquidity and market responsiveness, executing the rebalancing seamlessly and efficiently.

MarketCap rebalancing automation

Live Trading: Monitoring Real-Time Liquidity and Performance

Aelium’s Live Trading dashboard is a real-time testament to the platform’s adherence to market standards. It provides investors with immediate data on liquidity and asset performance, crucial for those who follow the best practices of market-cap-based portfolio management.

It shows current allocation and the overall health of the portfolio through various metrics, such as correlation and current risk. These indicators are essential for investors who prioritize liquid assets, offering a transparent view of how the portfolio is performing at any given moment.

Realtime Performance Monitoring for the MarketCap portfolio

In this case we can see how the rebalanced portfolio with the top 5 assets outperformed a broader market portfolio benchmark not only in a backtest but also in live trading.

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