The Russell 3000 Index gets re balanced every year. New stocks are added while under performing ones are removed. I recently read an article explaining how this event could be an opportunity for abnormal returns. When these stocks are added to the index they receive a lot more public attention, and as a result experience a spike in trading volume. The author argues that the best performing additions will continue to outperform the benchmark. I wanted to see if that was the case this year. A good test would be to compare multiple years and the results of the top performing additions to see if this strategy is consistent. Perhaps I will do that sometime in the future. But for now, we will consider the results of 2019.
The new additions are announced on the 28th of June each year. The author argues the optimal results can be achieved by waiting one month after the additions are finalized to determine the top performers. So that’s what I did. Below is a list of the top performing additions along with their percent change over approximately one month.
| Top 25 Performers | |||
| Symbols | 28-Jun | 24-Jul | Percent change |
| INS | 28.79 | 46.74 | 62.34803751 |
| GWGH | 7.14 | 10.21 | 42.99719888 |
| NXTC | 14.98 | 19.22 | 28.30440587 |
| TEUM | 2.61 | 3.3 | 26.43678161 |
| BYND | 160.68 | 202.92 | 26.28827483 |
| BRID | 29.76 | 36.3 | 21.97580645 |
| KRYS | 40.27 | 48.24 | 19.791408 |
| BLFS | 16.95 | 19.89 | 17.34513274 |
| RUBI | 6.36 | 7.39 | 16.19496855 |
| RRTS | 9.55 | 11.05 | 15.70680628 |
| JYNT | 18.2 | 20.99 | 15.32967033 |
| EVER | 13 | 14.84 | 14.15384615 |
| IDT | 9.47 | 10.76 | 13.6219641 |
| PLMR | 24.04 | 27.17 | 13.01996672 |
| DSPG | 14.36 | 16 | 11.42061281 |
| ARES | 26.17 | 29.04 | 10.96675583 |
| APPN | 36.07 | 39.89 | 10.59051844 |
| SONM | 12.73 | 13.98 | 9.81932443 |
| SMAR | 48.4 | 53.1 | 9.710743802 |
| CRK | 5.57 | 6.11 | 9.694793537 |
| GEOS | 15.11 | 16.52 | 9.331568498 |
| APPS | 5 | 5.46 | 9.2 |
| EB | 16.2 | 17.69 | 9.197530864 |
| ACRX | 2.53 | 2.76 | 9.090909091 |
| NG | 5.91 | 6.39 | 8.121827411 |
Below are various comparisons of performance. In the article, the author recommends choosing the top 10, though I recorded the top 25 out of curiosity. What’s interesting is how much better they performed compared to the Russell 3000 in that month: 17.6% vs 2.6% . Also, if I take the average of returns for all the new additions, it comes out as negative. As we can see, just because a stock was added to the Russell, does not mean it will benefit from increased trading volume.
| Comparisons (One month Performances) | |
| Top 10 performers | 27.74% |
| Top 25 Performers | 17.63% |
| Russell 3000 | 2.63% |
| New Additions Average | -5.36% |
Based on the article, the top 10 performing additions will continue to outperform for six months. So I will revisit this and see how they performed six months later.
Here is the Excel file I used:
Sources:
Henning, JD. (2019). Finding Abnormal Returns With the Russell Index Rebalancing Every June. Seeking Alpha. https://seekingalpha.com/article/4268687-finding-abnormal-returns-russell-index-rebalancing-every-june
Russell 3000® Index – Additions (2019). FTSE Russell. https://www.ftserussell.com/resources/russell-reconstitution
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