Why Do Removed Stocks Outperform New Stocks In The S&P 500?

According to the research of Wharton finance professor Dr. Jeremy Siegel, 82% of stocks that are removed from the S&P 500 go on to outperform the stock that replaced them in the index during his examination of subsequent three-year performance of the stocks.

This finding seems counterintuitive. If a stock gets added to the S&P 500, it must be riding a momentum wave that has seen its valuation increase. Likewise, a stock that is removed from the S&P 500 must have been riding a wave of sluggish performance that warranted its exclusion from the index. What gives?

To understand the mechanics of Siegel’s finding, contemplate the automatic nature of the S&P 500 selection process. At the close of 2016, the United States stock market consisted of $24 trillion in total wealth. About $8 trillion of that has been invested in passive investments that track indices like the S&P 500.

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