Industry Future
5 April 2023 Financial Analysts Journal Volume 79, Issue 2

Earning Alpha by Avoiding the Index Rebalancing Crowd

  1. Robert D. Arnott
  2. Christopher Brightman, CFA
  3. Vitali Kalesnik
  4. Lillian Wu
When unloved stocks are removed from cap-weighted indexes and frothy growth stocks are added, the price impact is large. Deleted stocks also materially outperform additions over the next year. Trading rules based on these patterns produce benefits.
Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content In Practice: Member Companion Feature Read Brief CFA Institute Member Content


Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent underperformance. It is well known that the price impact of these changes can be large once a change is announced. The subsequent reversal is less well known. For example, in the year after a change in the S&P 500 Index, discretionary deletions beat additions by 22%, on average. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 basis points a year. This benefit roughly doubles when we cap-weight a portfolio selected based on the fundamental size of a company’s business or on its multi-year average market-cap.

Hear from the Author

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.