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REVIEW STRATEGY

INTRODUCTION
METHODOLOGY
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PERFORMANCE
HISTORICAL DATA
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DOCUMENTS


Why is Index Review an Attractive Strategy?

It is widely known that the index needs to be reviewed periodically. For example, S&P 500 is reviewed quarterly, NIKKEI 225 is reviewed semi-annually, NASDAQ 100 is reviewed annually.

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.

Index Review

Definition

Index reviewing involves an initial review of assets, setting criteria based on market conditions, and making subsequent adjustments to asset weights, sometimes leading to the addition or removal of specific assets.

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.


Empirical Literature: Effects of Changes in Stock Index Compositions

Several studies have documented evidence of significant positive (negative) price and non-price effects when stocks are added to (removed from) an index.

Price and Trading Volume

An overwhelming majority of studies investigate the effects of the changes on price and trading volume. For example, Chen et al. (2004) and Wang et al. (2015) found that stocks added to an index often experience increased trading activity, while those removed may see declines in trading volume.

Institutional Stock Holdings

Pruitt and Wei were early researchers who studied how changes in index composition affect factors beyond just stock prices and trading. They found that institutional investors tend to buy more stocks that are added to indices, and this isn’t just limited to the S&P 500.

Rigamonti and Barontini (2000) and Biktimirov et al. (2004), found that when stocks are added to the Mib30 in Italy or the Russell 2000 in the United States, institutional investors tend to buy more of them.

Overall, research across different indices indicates that becoming part of an index often leads to increased institutional ownership, but leaving an index doesn’t always result in decreased ownership.

Liquidity

Most studies that look at how liquidity changes often use measures like the turnover ratio (for example Becker-Blease and Paul, 2006), Amihud illiquidity ratio (for example Chan et al. 2013), and bid-ask spread(for example Hegde and McDermott, 2003; Kamal, 2014; Wang et al. 2015). However, both the Amihud illiquidity and turnover ratios can have problems telling the difference between temporary and long-lasting changes in trading volume (Gabrielsen et al. 2011).

While many studies suggest that S&P 500 additions experience improved liquidity (for example Edmister et al. 1996; Beneish and Whaley, 1996; Erwin and Miller, 1998; Hegde and McDermott, 2003; Becker-Blease and Paul, 2006), as evidenced by narrower bid-ask spreads, the evidence for permanent liquidity enhancements is inconclusive. Beneish and Whaley (1996) and Kaul et al. (2000) found that the positive impact on liquidity for new S&P 500 and TSE 300 additions is often temporary, with bid-ask spreads reverting to pre-inclusion levels over time.

Selection Criteria

Table attached below are Index Revision Policies and Membership Criteria for Selected Indices:

Nr Index Replacement Pool Scheduled Changes/ Frequency Inclusion Criteria Transparency Level
1 S&P 500 Undisclosed Quarterly Various; incl. market cap, financial viability, reasonable price Low
2 NASDAQ 100 Disclosed Quarterly; Annually Market cap, liquidity, non-financial Moderately High
3 Dow Jones Undisclosed Annually Market cap, liquidity, Low
5 CAC 40 Disclosed Quarterly; Annually Market cap, liquidity, balance, trading volume High
6 DAX 30 Disclosed Quarterly; Semi-Annually Free float, liquidity, market cap High
7 Nikkei 225 Disclosed Semi-Annually Liquidity, sector balance Moderately High
8 TOPIX Disclosed Annually Change in listed Section to 1st Section from Mothers, JASDAQ and the 2nd Section High
9 Russell 2000 Disclosed Annually Market cap, liquidity, free float (no. of tradable shares) High
10 FTSE 100 Disclosed Quarterly Market cap High
11 MSCI World Disclosed Quarterly; Semi-Annually Various; incl. liquidity, free float, market cap, industry group High
12 Euro STOXX 50 Disclosed Quarterly Market cap, free float, sector balance High
13 ASX 50 Disclosed Quarterly Market cap High
15 CSI 300 Disclosed Quarterly Market cap High

Prediction Index Changes Feasibility

Indexes Rules Driven

The selection criteria is almost fixed for every index and public transparently. The Index Committee just bases on those fixed rules and reviews the index periodically.

If we know how these selection criteria work, we can predict the list of new addition or deletion of stock. Once the rules driven for those indexes are smoothly calculated, the probability of predicting the list of new addition or deletion of stock in an exact way is extremely high or almost never wrong. Since the selection criteria is almost fixed for every index.

Experience in the Indexes Review Constitution Files

Dr. Huu Minh MAI (Co-founder of BeQ Holdings) has nearly 20 years of experience working in European Stock Exchanges namely NYSE Euronext and Paris Option Market (MONEP), with specialization in Design and Development of new indices and Coordinate Trackers launch based on these new indices.

He was in charge of preparing French Indexes Review Files for the Conseil Scientific (Index Committee)

Therefore, BeQ Holdings believes to have enough expertise and ability to calculate and follow those driven-rules of reviewing indexes. Regardless of the driven-rules or replacement criteria of index are disclosed or undisclosed.

Investment

There are two primary approaches to allocate your investment in the group of new addition stock:

  • Capitalization weighted investment method (CW): the Investment amount in each company is proportional to its market capitalization. Larger companies with greater market value receive a higher proportion of the investment.
  • Equally weighted investment method (EW): the investment amount is distributed equally among all the companies, regardless of their market capitalization. This provides equal exposure to each company, irrespective of its size.

 

Date
Stock IN
 Event Return Accumulated Return
EW CW EW CW
01/2023 0 0.00% 0.00% 0.00% 0.00%
03/2023 3 3.55% 4.75% 3.55% 4.75%
06/2023 1 11.44% 11.44% 15.40% 16.73%
09/2023 4 4.95% 6.43% 21.11% 24.24%
12/2023 3 11.33% 8.45% 34.83% 34.74%
03/2024 4 2.43% 6.46% 38.11% 43.44%
06/2024 3 8.42% 11.76% 49.73% 60.31%
09/2024 4 13.27% 13.60% 69.60% 82.11%

 

 

 

Preparing Indexes Review March 2025

The simulation period for S&P 500:

Conducting from 01/2023 to 09/2024.

Including 7 index review events.

During this period, 22 companies in total were added to the S&P 500 and the investment strategy delivered consistent positive returns.

7 over 7 review events delivered positive returns using both the equal and capitalization weighted strategies.

Index Review Date Announce Date Effective Date Ticker Buy Price (USD) Sell Price (USD) Rt %
S&P 500 2024-09-01 2024-09-24 2024-09-30 AMTM 29.51 32.25 9.28%
S&P 500 2024-09-01 2024-09-06 2024-09-23 DELL 110.38 117.15 6.13%
S&P 500 2024-09-01 2024-09-06 2024-09-23 ERIE 491.44 537.02 9.27%
S&P 500 2024-09-01 2024-09-06 2024-09-23 PLTR 30.51 37.95 24.39%

Specifically, for S&P 500, table above shows the list of four newly added companies in September, 2024 with detailed information:

  • BeQ Holdings anticipated the list of predicted additional stocks at the beginning of September. These anticipated stocks were bought on 1st, September with the “buy price”.
  • These bought stocks would be sold on the first trading day after the effective date with “sell price”.
  • As can be seen from the table that all “buy price” is lower than “sell price” and produces positive return.

Preparing Indexes Review March 2025

Improve empirical research and simulation with a longer period and a larger sample of indexes
Measure Prediction quality in comparing forecast introduction or removals to actuals ones (October 2024 – Mid November 2024)

Continue conducting backtesting that follows the index driven-rules and compare the forecast review result with actual review result to evaluate the quality of forecasting

Implementation

Create Internal funds for BeQ Holdings shareholders and community (December 2024)

Based on a larger number of indexes national and global such as:

  • Global Market: Euro STOXX, MSCI Indices, …
  • US Market: S&P 500, NASDAQ, Dow Jones, …
  • European Market: FTSE, CAC, DAX, …
  • Asian Market: NIKKEI 225, Hang Seng, STI, KOSPI, SET Composite, Shanghai Composite, …
Optimisation of the strategy

If the probability of winning versus losing is high as indicated by the initial simulations (7 events and 7 positive returns), the strategy can be optimized by using leveraged instruments

  • CFDs
  • Stock Universal Futures (SSF): US SSF were discontinued since 2020, but for other markets, SSF still available
  • Margin Trading (the initial margin about 25% of the stock price).

Strategy should be adjusted in case of financial crisis like COVID-10 in 2020, and 2022.

Design an index based on the strategy and list on the BeQ RWA exchange to offer to a larger investors

This index tracks the performance of the strategy. Investors can buy/sell or monitor the performance of the index easily on the website.

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