Market Ethos - April 3rd, 2017

Indexing Bias

 

On the surface, most would view being added to the S&P 500 or TSX as good news for a company’s share price.  Conversely, being removed as a bad omen.  However, we have found the opposite to be true, with index dropouts outperforming index additions after the change has been made. We believe this is due to reversion in the price. Additions are bid up significantly ahead of index inclusion and deletions see heightened selling pressure.  Once the index change is made, this pressure often abates.