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Garden Indices

A market-cap weighted index assigns weights to assets proportional to their market capitalization relative to the total market capitalization of the portfolio (or basket). Here’s a structured overview of market-cap weighted indexes, based on the content of the document you uploaded.

1. Concept of Market-Cap Weighting​

A market-cap weighted index assigns weights to assets proportional to their market capitalization relative to the total market capitalization of the portfolio (or basket).

Formula:

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This ensures that larger companies or tokens (by market value) exert more influence on the index.

2. Steps in Construction & Rebalancing​

  1. Gather Data

    • Market capitalization of each asset.
    • Current dollar value held.
    • Asset prices.
    • Total portfolio value.

  2. Calculate Target Weights

    • Divide each asset’s market cap by the sum of all caps.
    • Example: If A = 500B, B = 300B, C = 200B → weights = 50%, 30%, 20%.

  3. Compare to Current Holdings

    • Identify deviations between current and target values.

  4. Rebalance When Needed

    • Sell overweight assets, buy underweight ones.
    • Match buy/sell so there’s no net cash flow.
    • Trade in whole shares/tokens.

3. Tolerance & Cost Efficiency​

  • Tolerance threshold: A set percentage (e.g., 5% of portfolio value) defines when trades are triggered.

    • Small deviations below threshold are ignored (avoids over-trading).
    • Example: On a $20,000 portfolio with 5% tolerance ($1,000), trades are only executed if deviations exceed $1,000.

  • Transaction cost minimization:

    • Fewer trades = lower fees.
    • Batch trades if managing multiple accounts.
    • Consider bid-ask spreads for cost/benefit.

Proposed architecture(WIP)​

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Trade samples​

Let’s work through three illustrative scenarios with WETH and ARB, where we compare target weights vs. calculated (current) weights under a 5% tolerance rule.

Assumptions​

  • Portfolio Value = $10,000

  • Asset Prices:

    • WETH = $2,000
    • ARB = $1.00

  • Target Weights:

    • WETH = 70%
    • ARB = 30%

  • Tolerance: +5% of total portfolio value ($500) — swaps are performed only if they improve the portfolio value by at least this much.

Case 1: Target weight = Current weight → No swap​

  • Current holdings:

    • WETH = 3.5 ($7,000 value, 70%)
    • ARB = 3,000 ($3,000 value, 30%)

  • Current weights = Target weights (70/30).

Action: No swap required. Portfolio is aligned with targets.

Case 2: Target weight higher → Swap performed​

Suppose current portfolio is:

  • WETH = 3 ($6,000, 60%)
  • ARB = 4,000 ($4,000, 40%)
  • Current weights: WETH 60%, ARB 40%.
  • Target: WETH 70%, ARB 30%.

To rebalance:

  • WETH target = $7,000. Currently $6,000 → need +$1,000 WETH.
  • ARB target = $3,000. Currently $4,000 → need –$1,000 ARB.

Swap $1,000 ARB → WETH.

  • Post-swap:

    • WETH = $7,000 (70%)
    • ARB = $3,000 (30%).

Value shift = $1,000 > $500 tolerance → Swap executed.

Case 3: Target weight higher, but below tolerance → No swap​

Suppose current portfolio is:

  • WETH = 3.3 ($6,600, 66%)
  • ARB = 3,400 ($3,400, 34%)
  • Current weights: WETH 66%, ARB 34%.
  • Target: WETH 70%, ARB 30%.

To rebalance:

  • WETH target = $7,000. Currently $6,600 → need +$400 WETH.
  • ARB target = $3,000. Currently $3,400 → need –$400 ARB.

Swap size = $400.

  • This is < $500 tolerance, so no swap performed.
  • Portfolio remains slightly off-balance but within acceptable bounds.

Summary​

  • Case 1: Perfectly aligned → no action.
  • Case 2: Significant deviation → swap performed.
  • Case 3: Deviation exists but below tolerance → no action.
caution

This architecture is still under development and will be introduced in a future release. The information provided here is preliminary and may change without notice.