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 average performance during the 5, 10, 21, 63, 126 and 252 trading days after deletion to the average performance of date-matched positions in SPDR S&P 500 ETF Trust (SPY). Using dividend-adjusted prices for 61 S&P 500 deletions at closes on deletion dates and corresponding dividend-adjusted prices for SPY during April 2020 through early November 2025, we find that: (more…)