Rebalancing

Core Concepts

Calendar Rebalancing

Rebalance at fixed time intervals regardless of drift magnitude:

• Monthly: Tightest tracking to targets; highest transaction costs
• Quarterly: Common institutional frequency; good balance of tracking and costs
• Annually: Lowest cost; may allow significant drift between dates

Calendar rebalancing is simple to implement and schedule but may miss large dislocations between dates or trigger unnecessary trades when drift is minimal.

Threshold (Band) Rebalancing

Rebalance when any asset weight drifts beyond a defined tolerance band around its target:

• Monitor weights continuously (or at regular intervals)
• Trigger rebalancing when |w_actual - w_target| > tolerance
• Typical bands: +/- 3% to +/- 5% (absolute) or +/- 20% to +/- 25% (relative)