Read This Before Buying New S&P SmallCap 600 Stocks

Several stocks have jumped on being added to the SP600, but those gains don't tend to hold

Oct 17, 2019 at 3:18 PM
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The shares of Glu Mobile (GLUU) got a boost earlier this week, on news the stock is joining the S&P SmallCap 600 Index (SP600). However, GLUU isn't the first stock to rally on its addition to the index -- we've seen similar pops for stocks like Fresh Del Monte Produce (FDP), Jagged Peak Energy (JAG), and Vector Group (VGR), to name a few. Against this backdrop, we decided to take a look at how stocks perform after being added to the S&P SmallCap 600, to see if the hype is really justified.

Crunching the numbers shows that buying the actual S&P SmallCap 600 itself -- as opposed to individual stocks joining the index -- tends to be more lucrative. For instance, the average one-month return of a new SP600 stock is a loss of 0.48%, with just over half the returns positive. That's compared to an average one-month gain of 0.77% for the index itself, with a nearly 60% positive rate, per data from Schaeffer's Senior Quantitative Analyst Rocky White.

Three months out, new additions were down 0.79%, on average, with a win rate of just 48.4%. The SP600, meanwhile, has averaged a three-month gain of 1.83%, looking at anytime data since 2002.

Six months later, those stocks were still in the red, on average, with just 47.2% positive. The S&P SmallCap 600 has averaged a healthy 4.15% gain during the same time frame. One year later, new SP600 additions were finally in the black -- up 4.62%, on average -- but only half were positive. The index itself has averaged a 12-month gain of 8.83%, with a 71.4% win rate.

SP SmallCap adds vs anytime 1

Echoing this, the bolded line in the chart above shows that not even half of new SP600 additions have outperformed the index at any time frame since 2002. In fact, a year after joining, only 38.8% of the small-cap stocks had beat the index.

This is further demonstrated by the chart below, which shows how rare it's been for new additions to outperform the index. The best year to jump into new S&P SmallCap 600 stocks was 2012, where more than half of the individual equities added outperformed the index at the three-, six-, and 12-month markers.

percent SP600 additions beat index - 2

Even zooming in on the current trading environment -- specifically, since 2010, after the financial crisis -- indicates that buying the small-cap barometer itself has proven to be more lucrative than buying new additions to the index. One month after joining the SP600, stocks were up 0.14% and higher 52.7% of the time. The index itself, though, has averaged a much more impressive 1.06% gain, looking at anytime returns since 2010.

It's essentially the same across the board. While new additions have averaged gains, and boast win rates just above 50% at each time marker, those gains have paled in comparison to the S&P SmallCap 600 itself. This is further evidenced again by the bolded column in the chart below, with not even half of new index additions outperfoming the SP600 itself at any point.

SP SmallCap adds since 2010 - 3

In conclusion, while many stocks recently have rallied on news of their move into the S&P SmallCap 600 Index, history shows those same stocks tend to underperform the actual index over the next year. As such, perhaps traders who are bullish on new additions to the index should consider hedging their bets with protective puts, or just going long the actual index or one of its affiliated exchange-traded funds (ETFs).


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