Exploiting S&P 500 Index Additions and Deletions

Can investors beat the market by exploiting preannounced (anti-value) changes to traditional capitalization-weighted indexes, generally comprised of additions with recent strong performance and deletions with recent weak performance? In their May 2022 paper entitled “The Avoidable Costs of Index Rebalancing”, Robert Arnott, Chris Brightman, Vitali Kalesnik and Lillian Wu examine ways to exploit any momentum and/or reversion in these potentially overvalued additions and undervalued deletions. They focus on the period since October 1989, when S&P began preannouncing (announcement date) changes to the index days or weeks before the effective date of the changes (trade date). They further focus on discretionary changes, distinct from those driven by spinoffs and divestitures (nondiscretionary additions) or bankruptcies and mergers (nondiscretionary deletions). They note that changes in index holdings were made at the market close on the effective date until February 2017, and the prior close thereafter. Using data for 663 S&P 500 Index additions and 299 discretionary deletions during October 1989 through June 2021, they find that:

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