Capped Index

DEFINITION of 'Capped Index '

An equity index that has a limit on the weight of any single security. Thus, a capped index sets a maximum percentage on the relative weighting of a component that is determined by its market capitalization. The rationale behind a capped index is to prevent any single security from exerting a disproportionate influence on an index.

BREAKING DOWN 'Capped Index '

For example, in Canada, the S&P/TSX Capped Composite index that is maintained by Standard & Poor's restricts the weighting of any component to a maximum of 10%, regardless of its market capitalization. The S&P/TSX Capped Composite index was introduced in 2002, subsequent to the rise and fall of Nortel Networks, which at its peak accounted for almost one-third of the total market capitalization of all stocks on the former TSX-300 index.

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