No. of Recommendations: 10
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
