In the U.S., winners get trophies and parades, while those on the losing end often fade quietly into the background. When Apartment Investment and Management (AIV) was removed from the S&P 500 in 2020 to make way for Tesla, Inc. (TSLA), many assumed AIV would fade into obscurity as Tesla enjoyed front-page triumph. Yet, in an unexpected twist, AIV’s stock delivered an 80% better relative return than Tesla in the first six months following its exit. While AIV, like other real estate companies, faced struggles when interest rates spiked in the early 2020s, its stock price remained up about 60% compared to its initial exit. This example underscores a surprising trend: companies removed from the S&P 500 have historically outperformed the market by up to 5% annually over the five years after their removal.
In this article, we’ll look at several companies that, following their removal from the S&P 500, have delivered impressive returns, while debunking myths about the price bumps that supposedly follow companies upon entering the S&P 500 index.
Key Takeaways
- Increased Visibility: Joining the S&P 500 often increases a company’s visibility and credibility, attracting passive investment flows.
- Perceived Failure: Being removed may signal diminished significance, but it can also create undervalued buying opportunities.
- Outperformance Potential: Many companies removed from the S&P 500 tend to outperform the market, with research indicating they may beat it by as much as 5% annually over the following five years.
What Happens When Companies Are Added or Removed from the S&P 500?
While inclusion in the S&P 500 index brings prestige and an influx of passive investments from index funds, removal is widely seen as a demotion. However, research reveals a potential silver lining. A study by Research Affiliates found that companies removed from the S&P 500 between 1990 and 2022 consistently outperformed those added, beating them by over 5% annually over the next five years.
This trend appears to stem from initial overvaluation and undervaluation dynamics. Stocks added to the index often experience inflated demand and higher valuations due to increased buying activity, while stocks removed from the index undergo sharp sell-offs, creating value opportunities for contrarian investors.
The “Index Effect”
Wall Street frequently cites the “index effect,” which suggests a stock’s addition to the S&P 500 will automatically boost its price. However, recent data challenges this belief. While joining the S&P 500 once triggered a strong positive effect, especially in the 1980s and 1990s, the effect has diminished significantly since the 2000s. By the 2010s, stocks added to the S&P 500 saw just a modest 0.8% increase, with stocks removed showing little negative impact.
Analysts attribute this shift to several factors:
- Market Efficiency: Improved liquidity and institutional involvement have helped the market absorb demand shocks from index changes, reducing price impact.
- Migration Between Indexes: Many companies move between the S&P 500 and the S&P MidCap 400, making changes less disruptive.
- Predictable Changes: Anticipatory trading by arbitrageurs has diminished price fluctuations at the time of actual index changes.
Why the S&P 500 Adjusts Its Constituents
The S&P 500 is designed to represent the largest and most influential U.S. companies, meaning the index must evolve alongside the economy. A committee at S&P Global reviews the list quarterly to ensure it accurately reflects the economic landscape. To be eligible, companies must meet certain criteria, including a market cap of at least $18 billion, adequate liquidity, and positive earnings over the past four quarters. However, even meeting these criteria doesn’t guarantee inclusion, as the committee may exercise discretion to maintain sector balance.
Examples of Companies That Outperformed After Being Removed from the S&P 500
- Zions Bancorporation N.A.
- Removal Date: March 18, 2024
- Performance Since Removal: 52% vs. S&P 500 at 15%
- Despite a regional banking crisis, Zions rebounded, aided by an improved economic outlook and the Federal Reserve’s rate cuts.
- Lincoln National Corporation
- Removal Date: Sept. 18, 2023
- Performance Since Removal: 42% vs. S&P 500 at 33%
- Following a tough few years, Lincoln National rebounded as it controlled costs and improved its balance sheet.
- Lumen Technologies Inc.
- Removal Date: March 20, 2023
- Performance Since Removal: 262% vs. S&P 500 at 51%
- After a strategic refocus and new AI partnerships, Lumen’s stock surged, benefiting from a favorable tech environment.
- PVH Corp.
- Removal Date: Sept. 19, 2022
- Performance Since Removal: 86% vs. S&P 500 at 54%
- The brand’s diversified portfolio and strategic global reach helped it regain investor confidence.
- Apartment Investment and Management Company (AIV)
- Removal Date: Dec. 21, 2020
- Performance Since Removal: 79% vs. S&P 500 at 61%
- Despite initial doubts, AIV’s focus on real estate positioned it for growth amid rising property demand and favorable interest rates.
How Often Does the S&P 500 Add or Remove Companies
The S&P 500 rebalances quarterly, although changes can happen anytime if a company undergoes major restructuring, is delisted, or is acquired. In 2024, for example, 12 companies were removed, while 15 were replaced in 2023.
What Stocks Were Removed from and Added to the S&P 500 in 2024
Removed: American Airlines Group (AAL), Etsy Inc. (ETSY), and others. Added: Amentum Holdings Inc. (AMTM), Palantir Technologies Inc. (PLTR), Dell Technologies Inc. (DELL), and CrowdStrike Holdings (CRWD).
When a stock is removed from the S&P 500, it may initially seem like a red flag, but history shows these companies often find fresh momentum and deliver impressive returns. Exclusion from the index doesn’t mark the end—rather, it can be the start of a comeback story that capitalizes on undervaluation and market overreactions. For investors, some of the best opportunities may lie not with the celebrated “winners,” but with the overlooked companies quietly making their return to favor.
