Remember the S&P effect detected in the 1980s, in which stocks included in the index experienced a surge in ownership? Well, there's also a small-stock index effect.
According to Institutional Technology Group, New York, the annual reconstitution of the Russell 2000 index that began May 31 will culminate in a newly composed index July 1. The revamping leads to a flurry of trading activity as money managers apply the new index to their investment vehicles.
"It also creates a window of investment opportunity and risk since stock prices may be affected over the short term," said a report from ITG, which is tracking performance of a model portfolio of stocks it predicts will be included or excluded from the index.
"In both 1994 and 1995, stocks added to the index substantially outperformed those deleted during the reconstruction period. But in 1995, the price impact of the changes was double what we'd seen the previous year," said David Cushing, ITG's director of research.
He said the spread between "adds" and "deletes" widened to nearly 12% in 1995 from 6% in 1994, as measured between May 1 and approximately one week after reconstitution. Last year and in 1994, the price differential between stocks added and deleted began increasing sharply four days before the reconstitution was put into effect, but disappeared within a matter of weeks.