RE: Upgrade9 Aug 2021 18:05
Each quarter, index provider FTSE Russell reviews each index to see if any members should be relegated or promoted. For a company to enter the FTSE 100 at a reshuffle, it has to have a market cap that puts it in the top 90 by size. Similarly, once in the FTSE 100, a stock has to fall quite far to be relegated it has to have a market cap below that of the 110th biggest company in the UK stockmarket.
This prevents stocks from constantly dipping in and out of either index at each reshuffle, but there are usually at least a few changes in fact, the review prior to this week's (the September reshuffle) was the first in 12 years that resulted in no changes being made.
So what, if anything, can an investor make of these moves? As Tom Stevenson notes in The Daily Telegraph, a study by Smith's Corporate Advisory shows that, on average, stocks heading for relegation lost nearly 19% in the two months prior to the announcement date. Similarly, companies that made it to the FTSE 100 enjoyed average gains of more than 15% in the run-up to the news, then another 2% up to the actual joining date. This is partly down to funds that track the FTSE 100 having to sell or buy stocks that leave or join.
But that's no help to those hoping to make an "arbitrage" trade after all, this movement mostly happens prior to the review. And once a stock has joined its new index, its performance shifts new FTSE 100 entrants typically lost 5% in the two months after joining, while those relegated to the FTSE 250 were flat. In reality, says Stevenson, the quarterly reviews are pretty predictable by the time the results are out, they have been priced in.
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