How to Play the Nasdaq-100 Rebalancing

Using contrarian sentiment theory, the stocks removed will tend to outperform those added

Senior Quantitative Analyst
Dec 15, 2021 at 8:00 AM
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Six companies were replaced in the Nasdaq-100 Index (NDX) for their annual rebalancing. The tables below list the six companies being added and removed from the index which is made up of the largest non-financial firms. In the analysis below, I compare the next year’s performance of those added to those removed.

iotw  chart 1 dec 14

Additions vs. Removals 

Since 2010, I tracked 65 stocks added to the Nasdaq-100 and 59 removed. It’s not a comprehensive list because I only have data on stocks currently trading. Also, I am only considering the stocks added and removed in December during the annual rebalancing. I’m not considering stocks eliminated and added mid-year for other reasons.

Using contrarian sentiment theory, the stocks removed will tend to outperform those added. Stocks added tend to be those that have performed well and have some hype behind them. It’s an indication of bullish sentiment which has bearish implications based on our contrarian philosophy. Also, the original announcement of stocks being added will create buying pressure for those stocks by funds that replicate the index. The buying pressure will push the stock price above fair value causing underperformance going forward. Vice versa for those removed.

The tables below summarize the returns of the added stocks and those removed over the next year. The stocks removed have performed better, though this has been marginal and mostly in the short-term. The biggest discrepancy has been at three months after rebalancing. The stocks removed averaged a gain of 8.15% with about 70% of the returns positive. The stocks added to the index gained an average of 4.67% with just below 60% of returns positive. Also, stocks removed outperformed the Nasdaq-100 Index 52.5% of the time while those added did so 46.2% of the time. Summarizing the stocks like this has shown little difference in performance over the next full year. 

iotw chart 2 dec 14

This table breaks down the three-month returns by year. The stocks removed beat the new additions in only four of 11 years including last year. When they have outperformed, however, it has been by a wide margin so the overall average return has been better for those removed. 

iotw chart 3

This last table shows the year-by-year performance over the next 12 months. In this case, it’s the new additions that performed better in only four of 11 years. The overall average return is about equal because the outperformance in those four years was by a wide margin. That’s especially true in two of the past three years. From 2010 to 2015, the stocks removed did much better than those added. Since then, however, it has been the opposite. 

iotw chart 4 dec 14


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