In the last few days we have witnessed as we occasionally can that indices are truly managed actively. Some may question the timing. Today we will look at the current changes, consider the history of changes, and close with why this happens, and why indices are not passive even if you do nothing.
Friday, March 1st after market close S&P announced they were adding two stocks and removing two. Super Micro and Deckers were being added and Whirlpool and Zion Bancorp were being removed. This announcement comes only after Super Micro (the largest position in the Russell 2000 small cap index) has come off an insane 5-year price run. For 2024, it is up 283% and the last five years it is up 5479%, blowing the doors off all the stocks you considered to be “awesome”. Keep in mind, I am starting to write this in the evening after the major market indices all were down over 1%. SMCI (Super Micro) was up today. Deckers, the footwear company that makes Hoka, Teva, and UGG brand shoes as well as some others is impressive too. For 2024, it is up over 35% and for the last five years it is up over 525%. Wonder who has been eating Nike’s lunch? DECK (Deckers) and several other upstarts have been at the feed trough.
Whirlpool is down almost 14% for 2024 and over 12% for the last five years. Zion Bancorp is down almost 6% for 2024 and down over 4.5% for the last five years. Who can fault the committee for removing these stocks? What is the head scratcher is how late it appears they are at adding Super Micro and Deckers. Maybe they are correct in their assessment and homework as to whom to add, but superficially it appears like they are chasing performance and are late to the game.
Frankly, I can’t make a good argument because it appears they’ve swapped out some value names for some growth names. The fundamental ratios on the companies entering and leaving as are about as far apart as they get. Good in their own right as Growth companies entering, and Good on their own right as Value companies exiting. This leads me to believe this as close to active management as you can get. A nudge in growth and a reduction in value for an index that is regarded as Large Blend.
I can’t poke their eyes out for this choice. My own process and protocol have SMCI and DECK come up in one or several of the very quantitative screens I use. As well as SMCI has done in the past, it appears attractively priced for its growth prospects going forward if it can meet those expectations. Same for Deckers which is part of a new generation of shoes competition for the the old guard. And one can witness companies like Nike and Adidas are struggling in this environment as upstarts like ON, Deckers, No Bull, and even Sketchers are not just nipping at their heels, but sometimes dominating in areas once thought untouchable.
Below is a list of all the changes to the S&P500 lineup since 1997 sourced from Wikipedia (links still live and will tell you about each company!). It becomes fairly clear, the S&P500 is a living breathing entity and is nothing like it was in the 1990’s with over 300 changes in over 25 years. What we view as glacial, steadfast, and never changing is a dynamic tool doing it’s best to be a relevant benchmark of the market and businesses in our economy. Most only focus on the Top 10 holdings because the “cream does rise”, but further down is where the competition to stay in and stay relevant become the challenge.
Maybe the S&P committee is correct in their decisions. But DO NOT call the index passive. In the competition of indices, it is imperative to keep your index relevant, a leader, and fresh. Otherwise just like everything else, it is susceptible to being overtaken by the new-new index that is winning people over. There is nothing mindless or passive in this financial competition. In the end, with so much investment product dependent on mimicking these indices, it is a good thing for all the investors pretending it is a passive world. At least someone isn’t asleep at the switch!
The above file is an Excel spreadsheet of all the S&P500 Changes since 1997.
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