Vaccine maker Moderna joined the S&P500 last week, much to the delight of investors in the company. Trading below $250 in mid-July, the stock briefly exceeded $340 last Tuesday, giving it a market capitalisation of $135 billion ahead of Wednesday's index debut.
News of index changes often results in investors piling into the stock being added, the presumption being that higher prices are coming as a result of index-tracking funds forced to buy the stock.
In fact, you'd be better off steering clear of the stocks being added and buying the index deletions, according to Rob Arnott of Research Affiliates.
Tesla example
In December, Arnott predicted that new S&P 500 entrant Tesla would underperform the company it was replacing in the index, Apartment Investment and Management. Arnott declared victory on that point in a recent note, observing that the latter had outperformed Tesla by a “stupendous margin”.
Tesla was following the historical script: Arnott’s data shows additions tend to lag the deletions by 14 per cent over the following six months and by almost 20 per cent after 12 months.
An index rebalance typically adds strongly performing stocks and deletes poor performers. Moderna certainly falls into the former category; shares have risen by over 1,500 per cent from pre-pandemic levels.
