How Index Review Impacts the Stock Market?

The regular reconstitution of equity indices can significantly influence the performance of companies included or excluded. Extensive academic research has explored the impact of these changes on stock prices, trading volume, and other firm attributes. Studies have consistently demonstrated that inclusion in a prominent index often leads to increased investor interest, while exclusion can have adverse consequences.

Index rebalancing often triggers a surge in trading activity due to the immediate need for institutional and retail investors to adjust their portfolios. Asset managers overseeing index funds or ETFs must rapidly rebalance their holdings to align with the new index composition, leading to increased demand for the added stocks and decreased demand for the removed ones. This heightened trading activity can create short-term price discrepancies that arbitrageurs may exploit for profit.

Index rebalancing can significantly impact stock volatility. Newly added stocks often experience price increases due to buying pressure from index-tracking funds, while removed stocks may face selling pressure, leading to price declines. Although these price movements are often short-lived, they can create both challenges and opportunities for active investors seeking to capitalize on market inefficiencies.

Index Review Strategy

S&P 500 Case study

Opportunity and Strategy

Particularly for the case of S&P 500, it is reviewed quarterly for every 3 months in March, June, September, December.

The list of companies that are qualified for the S&P 500 will be anticipated on the first trading day of the review month (March, June, September, December).

Effective date is the first trading day after the third Friday of March, June, September, and December.

Based on transparent rules and experience on the index Committee, early trade before announcement will have significant profits.

Having enough ability to anticipate the list of new stock addition/ deletion, BeQ can take the advantage from temporary market swings when an index announces changes and makes profit. By predicting the list of new addition before any official announcements announce, BeQ has the advantage of:

• Buying forecasted additional stocks with lower price at the beginning of review month.
• Selling the purchased stocks after the effective day with a higher price. Once the newly added stocks are part of the index, they can create temporary market swings. Stocks added might see a short-term price increase due to buying pressure. BeQ can potentially profit from these short-term price movements.