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This post examines the performance of stocks that were removed from the S&P 600 Small Cap index.

On 2023 June 02 (following market close) S&P announced a shuffling within indexes, including the S&P 600:

https://www.spglobal.com/spdji/en/documents/indexn...

Eighteen stocks were removed from the S&P 600 index. An equal weight basket of those stocks, purchased at market close 6/5/2023 through 6/7/2024, returned -13.56%. The tracking ETF VIOO returned 14.11%. So significant underperformance for the ex-index stocks. Here are the returns for the individual stocks:

CUTR -88.45%
PETS -70.42%
CMTL -80.02%
EGRX -80.44%
PLCE -34.62%
RYAM 56.47%
LPSN -81.35%
GCI 100.00%
BOOM -26.40%
GCO 42.59%
ZUMZ 38.38%
TREE 115.78%
TG -23.82%
INGN -13.69%
DOUG -56.86%
FARO 18.97%
CARA -80.25%
BIG -54.92%

Seems to fly in the face of studies that suggest outperformance of stocks that are removed from an index. Or maybe that only applies to mid/large cap indexes?

John

One study looking at S&P 500 deletions/additions showed at the 6 month and 12 month mark the positions changed,
and then deletions outperformed and additions underperformed.

Seems to fly in the face of studies that suggest outperformance of stocks that are removed from an index. Or maybe that only applies to mid/large cap indexes?

Maybe. For one thing, the math for a "biggest cap" cap-weighted index is subtly different from the math for a "tranche" by market cap as things can be promoted OR demoted. Nothing gets promoted off the top of the S&P 500 because it got too big. And of course even the smallest of S&P 500 firms is pretty large, and pretty large firms generally have pretty good solidity and access to capital, perhaps less true of those at the bottom of the 600.

But also the underperformance is usually observed at longer time frames, say 6-12-18 months. The recent movements are perhaps just continuation of the finite-length particular trends that got them bumped from the index? You also want to track the group that just joined the index for comparison.

For a mid cap index, you'd probably want to track four categories: those that left the index because they were promoted upwards, those that left by being demoted downwards, those that arrived from above by demotion, and those that arrived from below by promotion.


Also, as with all such effects, there is no reason to suppose that it's true ALL of the time.

Jim

One study looking at S&P 500 deletions/additions showed at the 6 month and 12 month mark the positions changed,
and then deletions outperformed and additions underperformed.

Well, that's interesting. Again, not what I witnessed. I didn't post this because I didn't collect data, but I have "visually" tracked the progress over the last year in a spreadsheet I set up. Out of the gate the deletions outperformed - my recollection is they were up collectively about 20% vs <10% for the index, this after a few months (sorry, going by memory). Then they tanked, and in the last month or so have actually recovered a bit.

John

I ran an equal weight portfolio of the S&P 600 and the S&P 400 for both Additions and Deletions from the begin date of the changes till yesterday. Here are the results:

Test  Results            ROI      CAGR     GSD   Sharpe  DDD3    BBW    Win %  Drawdown
LTBH  S&P 600 Additions  1.24%    1.28%    28.7  -0.02   5.02%   0.26   59%    -24.57%
LTBH  S&P 600 Deletions  -23.41%  -24.12%  43.3  -0.79   25.20%  -1.04  33%    -40.53%
LTBH  S&P 400 Additions  -0.40%   -0.41%   19.4  -0.36   5.56%   -0.08  50%    -16.77%
LTBH  S&P 400 Deletions  0.28%    0.29%    33.5  0.07    5.93%   0.05   60%    -25.31%

Can we draw any conclusion from this regarding whether to invest in one basket or the other? Answer: No!

For a mid cap index, you'd probably want to track four categories: those that left the index because they were promoted upwards, those that left by being demoted downwards, those that arrived from above by demotion, and those that arrived from below by promotion.

Same for the small cap S&P600 index. You want to track separately the stocks that have been promoted into the mid-cap S&P400 versus those that have been dropped into oblivion.

Elan

I mistyped:
deletions outperform at first after deletion:

"stocks poised for inclusion in the S&P 500 tended to outshine the broader index by about 2.6% in the two-week run-up to their addition. However, once officially added, these stocks often fell short of the index and on average they underperformed by 4.7% over the next 12 months.
Conversely, companies on the verge of removal experienced an initial downturn, selling off before their actual exclusion. Yet, once removed, these stocks frequently started to recover, outpacing the index by nearly 5% on average in the following six months and by almost 16% over the next 12 months."

https://www.wisdomtree.com/investments/blog/2024/0...

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