The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
On 4 September 2020, it was announced that ETSY, TER and CTLT to be added and HRB, COTY and KSS to be deleted from the index. Effective date is prior to the open of trading on Monday, 21 September 2020.
Since the index has over $11.2t indexed or benchmarked to it, logically, components stocks that are added or deleted from the index should have big impact to their stock prices. Fund managers tracking the index should need to follow the index and buy and sell the stocks that are added and deleted respectively.
Let us look at the charts of stocks that were deleted from the index in the recent two years below. We have a sample size of 9 stocks, MAC, TRIP, AMG, ADS, HOG, SIG, PDCO, CHK and JWN. The marked candle on the chart was the date of announcement, and the following candle with a huge volume was the implementation date.
The following can be observed:
8 out of 9 stocks closed at a lower price than the opening price on the implementation date
7 out of 9 stocks closed lower the following trading day
It seemed that most fund managers wanted to track the index closely so most selling were done on the same day, the implementation date, so the stocks closed the day low.
Let us look at the charts of stocks that were added to the index in the recent two years below. We have a sample size of 9 stocks, STE, ZBRA, LYV, TDY, TYL, NKTR, SIVB, TTWO and BIO.
The following can be observed:
4 out of 9 stocks closed at a higher price than the opening price on the implementation date
The results were significantly different from that observed from stocks that were deleted from the index. Even though the volume on the implementation date was very high, which signaled there were funds following into the stocks, the buying by fund managers tracking the index was insufficient to push up the stock price overall on the implementation date.
Conclusion
There was a strong tendency for the stocks that were removed from the S&P500 index to close near day low on the implementation date, and to continue to drop the next day. So investors can profit by shorting the stocks at open on the implementation date and buy back the stocks on the close day after.
However the reverse did not work for stocks that were added to the index. Perhaps the methodology for stocks to be added to the index was too transparent and already gamed by fund managers. Fund managers already knew which stocks would be added to the index, so the optimal solution is buy before the announcement of inclusion to index and “sell on the news” – when the stocks were added to the index. Perhaps even to the extent of pushing the share price or market cap of the stock high enough so that the stock would be added to the index.
