What Is a Float-Adjusted Index

Float-adjusted weighting, commonly called free-float weighting, is a form of market-cap weighting.

However, instead of all shares outstanding, it computes weights using only the shares that can actually trade in the market (the free float). It excludes shares that do not come to the market — founder and major-shareholder stakes, treasury stock, and shares held long-term by the government or strategic investors.

For example, if a company has 100 million shares outstanding but 40% is locked up in founder holdings and treasury stock, only the remaining 60 million shares are reflected in the index weighting. That makes this company's weight in the index smaller than under the total-market-cap method.

In the past, market cap was calculated using all shares outstanding. But this method had a problem.

Companies with few tradable shares (e.g., where major shareholders hold most of the stock) still looked large by total-shares market cap and took up big weights in the index. Then funds tracking the index end up over-exposed to stocks that are hard to actually buy (thinly traded) — a distortion.

Free-float weighting reduces this distortion by basing weights on 'the size you can actually invest in.' In other words, the reason for its introduction is to raise the index's investability.

Flagship indices moved to this method too.

The S&P 500 transitioned to free-float adjustment over 2004–2005, fully implementing it in September 2005.

MSCI, the global index company, also introduced its 'Enhanced Methodology' in the early 2000s and adjusted its constituents to a free-float basis.

Interestingly, changing the method this way did not greatly change the 'overall level' of the index. According to S&P's analysis, eight years after free-float was introduced (as of 2013), the difference in index level was only about 0.8% (77bp). It was a change that redistributed weights among individual stocks rather than altering the overall size.