Intel shares are down 60 per cent in 2024, prompting talk it may be kicked out of the Dow Jones index.
That may dent Intel’s reputation, but might it somehow be good news for shareholders? Perhaps, according to Research Affiliates founder Rob Arnott, who has launched a new exchange-traded fund (ETF) consisting of companies that have been deleted from indices such as the S&P 500 and the Dow.
The ETF, which is available to Irish investors but not in the rest of Europe, may sound like a gimmick, but research shows companies deleted from indices tend to outperform their replacements. Deleted companies “are often unloved, have fallen out of favour and are no longer valuable enough to be deemed important”, says Arnott. Similarly, index additions tend to be high-flyers – typically, they have more than doubled compared to the stocks they replaced.
A recent example is AI stock Super Micro Computer, which was added to the S&P 500 in March after shares rapidly quadrupled in value.
Market trends often go too far, setting the scene for an eventual reversal. Arnott’s research suggests that over the following five years, deleted stocks outperform by more than 5 per cent annually.
As it happens, the Super Micro bubble subsequently burst and the stock has since fallen 60 per cent. As for Intel, expect grim headlines if it’s kicked out of the Dow, but there may be, as Arnott puts it, an “upside of getting dumped”.
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