By Toby Lawes
Announcement day pops have returned since the COVID-19 pandemic
The rise of retail trading since the COVID-19 pandemic has led to the resurgence of the S&P 500 index inclusion effect, according to new research from Goldman Sachs.
The phenomenon, where stocks experience large relative pops on the day their promotion is announced, was weak between 2013 and 2015 before all but disappearing between 2015 and 2019.
But as the below chart shows the effect has returned in recent years and so far in 2025 index additions including Block, Coinbase and DoorDash have outperformed the equal weight S&P 500 by an average of 7.4 percentage points on announcement day.
Chart 1: Announcement day outperformance of stocks added to S&P 500, 2013-present
Source: Goldman Sachs Global Investment Research.
That is over and above the 12-percentage points of outperformance that new constituents enjoyed in the three months leading up to announcement day. The analysts found no evidence that superior performance continued after the reshuffle was completed – something Research Affiliates identified in the construction of its US-listed index deletions ETF.
The Goldman Sachs team ascribed the resurgence of the index inclusion effect to elevated retail activity in the US stock market since the covid-19 pandemic.
Due to prodigious share price rises over a short window, stocks increasingly leapfrog the S&P 400 mid cap index on their way to inclusion in the top benchmark which leads to an elevated impact on announcement day, as the below illustrates.
Chart 2: Announcement day outperformance of stocks added to S&P 500 based on prior S&P 400 membership
Source: Goldman Sachs Global Investment Research. Period of study is 2013 to 2025.
Many of the companies to enjoy the biggest announcement day leaps in the last few years are notorious retail darlings like Palantir, Super Micro Computer, Coinbase, and Datadog.
Part of the explanation for the pronounced announcement day moves concerns the subjective element of index membership. While S&P DJI lays out the criteria for S&P 500 eligibility, a committee ultimately retains some subjective control over additions and deletions. New members can therefore surprise the market.
Most of its index peers take a more predictable, rules-based approach, so new constituents are known ahead of announcement day. Hedge funds and liquidity providers are already ahead of the trade.
A more important element, one which explains why the effect waxes and wanes over time, is simply that inclusion into the world’s most famous benchmark boosts retail enthusiasm for stocks that already need very little excuse to go up.
A capital markets head at one issuer told ETF Stream that his firm does not begin the rebalance process for equity ETFs ahead of announcement day because it would lead to too much tracking error.
MSCI, for example, announces additions and deletions two to three weeks before effective date – a long time to differ from the benchmark. For the S&P 500, the average gap is five days.
Many issuers do, however, begin the rebalancing process between announcement day and the effective reconstitution date.
A recent study called On the hidden costs of passive investing found that strategies that acquired small portions of the required shares ahead of the rebalance date could save investors hundreds of basis points in lost performance, with limited additional tracking error.
The study found that additions to the S&P 500 between 1990 and 2002 experienced abnormal returns of 8.8% from five days before the reconstitution date to one day after. Many reversed course in the following month.
David Hsu, head of index equity and ETF product specialism at Vanguard, told ETF Stream that sacrificing so much performance “makes very little sense” for investors, especially given that the extra tracking error is minimal.
He said the firm’s portfolio managers and traders begin the rebalancing process in the days leading up to the index reconstitution – but after announcement day – and trades are crossed where possible to save costs.
“But this is simplifying the matter; each rebalance is unique, and each name is unique. The team do a lot of analysis on this. It really is done on a case-by-case basis.”
Originally published on ETF Stream.
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