Fortune Article - Anyone can beat the stock market

What did Rob Arnott predict about Tesla and Aimco when Tesla joined the S&P 500?

Tesla would underperform the S&P 500 in the year after entry, and Aimco, the stock removed, would outperform the index by up to 20%.

How did Tesla and Aimco perform six months after Tesla’s S&P 500 inclusion?

The S&P 500 was up 17%, Tesla was flat (underperforming), and Aimco was up 44% (outperforming by more than 20%).

Why do index funds create trading opportunities during S&P 500 rebalancing?

Index funds must buy the incoming stock and sell the outgoing stock at the closing price before the switch to avoid tracking error, causing trading mayhem.

What happened to Tesla’s stock price in the month before its S&P 500 inclusion?

Tesla’s stock rose 57% from the announcement (November 17, 2020) to December 17, as traders bought it knowing index funds had to buy on December 18.

What happened to Aimco’s stock price in the month before its S&P 500 removal?

Aimco’s stock fell 17% as investors sold it off, knowing index funds would dump it on December 18.

What is the trading strategy for S&P 500 rebalancing?

Buy the outgoing stock (sold at distressed prices) and sell the incoming stock (pushed to high prices) on the day before the switch.

How often do S&P 500 rebalancing opportunities occur?

About 10 times a year on average, with 23 stocks replaced annually, though discretionary switches (like Tesla-Aimco) are the best opportunities.

What has been the historical performance of buying outgoing S&P 500 stocks?

Buying outgoing stocks in discretionary deletions at the closing price on removal day has beaten the market by nearly 20% over the next 12 months.

Why hasn’t the efficient market hypothesis eliminated this trading opportunity?

The scale of indexers ($5 trillion in S&P 500 assets) creates massive buying/selling pressure that outweighs arbitrage attempts.

How does the belief in efficient markets contribute to this opportunity?

Trillions are invested in index funds because people believe stock picking doesn’t work, increasing indexers’ impact and creating exploitable price distortions.

What is the cost of S&P 500 rebalancing for index fund investors?

Rebalancing costs 20 to 40 basis points annually, far exceeding the low expense ratios (1.5–4 basis points) of major S&P 500 funds.

How can index funds reduce rebalancing costs?

Rebalancing three months after the effective date, rather than the day before, has beaten the index by 13 basis points on average over 18 years.

Why don’t index funds delay rebalancing to improve performance?

They prioritize zero tracking error, as even positive tracking error is seen as undesirable by investors conditioned to expect exact index matching.

How can individual investors benefit from S&P 500 rebalancing?

Buy the outgoing stock or sell the incoming stock during rebalancing, which has historically been an excellent investment strategy over time.