How to Trade New Nasdaq-100 Stocks In 2019

Surprisingly, removals have outperformed additions since 2010

Senior Quantitative Analyst
Jan 1, 2019 at 12:33 PM
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The Nasdaq-100 Index (NDX) is made up of the largest non-financial companies. The index recently underwent its annual rebalancing, adding six companies and removing six. The tables below show the six additions and removals, along with their 2018 return and analyst "buy" percentages from Zacks. (Note that Express Scripts (ESRX) is no longer trading). In the rest of the article, I show some interesting stats on how the annual additions and removals perform over the next year.

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NDX Additions vs. Removals

There are 48 stocks trading that have been added to the Nasdaq 100 since 2010 and 43 that have been removed. I’m only considering the stocks added and removed in December during the annual rebalancing. I’m not considering stocks eliminated or added mid-year due to bankruptcy, mergers, etc. Looking at the returns over the next year, from the date they were added or removed, the stocks removed have performed much better than those added. The average return across all the time frames for the stocks removed are at least double the average of those added. The percentage of stocks positive is also better among those removed.

One theory is that when the specific stocks that are to be added or removed are known, funds that replicate the Nasdaq 100 immediately begin buying the newly added stocks and selling the stocks to be removed. The stock prices on the additions are pushed above their fair value while the prices on those removed are pushed below their fair value. Over the next year, the stock prices naturally gravitate toward their fair value, meaning the newly added stocks will tend to underperform the ones removed.

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The table below looks at the one-year performance of the stocks added and removed from the Nasdaq 100 Index for each year since 2010. Overall, of the stocks added to the index, only one-third of the stocks beat the index over the next year. Of those removed, more than half beat the index. Also, the average return of the stocks removed outperformed those added in six of the eight years.

Based on all this, if you’re looking to add a stock for 2019 then you’ll tend to do better by picking from the list of stocks recently removed from the Nasdaq-100 Index.

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