Consider MSCI’s large-cap index, which will include the 300 American companies with the largest market capitalizations. Without a buffer zone, the index would have to sell a stock as soon as its market-cap ranking dropped to 301st, and buy it back if it rose back to 300th. But MSCI will have a buffer zone of 225 to 400 – meaning that a stock won’t be sold until it falls to 401st, or repurchased until it rises back to 225th.
While the zones will reduce turnover, their impact on fund returns is likely to be small. That is because, when buying or selling stocks, most fund companies that offer index funds just transfer shares from one fund to another. Mr. Tint estimates that this practice, known as crossing, already eliminates as much as 80 percent of the transaction costs that index funds would otherwise have to pay.