S&P 500 Deletions Beat the Market?

“Nixed: The Upside of Getting Dumped”, flagged by a subscriber, finds that “index deletions…could add an abnormal upside to a portfolio when the current growth-dominated bubble starts to deflate.” The authors have quantified findings as the Research Affiliates Deletions Index (NIXT), constructed by:

1. Starting with deletions due to market capitalization changes from the 500 and 1,000 largest U.S. stocks by market capitalization.
2. Removing the bottom 20% of deletions based on firm quality assessments.
3. Holding the equal-weighted remaining deletions up to five years (or until they rejoin a top market capitalization index), rebalancing annually at the end of May.

Do index deletions inherently underperform? To investigate we look at stocks deleted from the S&P 500 Index due to market capitalization changes over the past few years and compare their performances to that of SPDR S&P 500 ETF Trust (SPY) since the close on respective deletion dates. Using dividend-adjusted prices for 43 S&P 500 deletions at closes on deletion dates and corresponding dividend-adjusted prices for SPY since during April 2020 through 8/23/24, we find that: (more…)