The widely followed Nasdaq-100 Index (NDX) rebalanced earlier this month. That means some stocks got added to the benchmark, while others removed. Six stocks were added to NDX, meaning those names will join index funds and ETFs that track the gauge. Likewise, six stocks were removed. Those stocks are now members of the NASDAQ Next Generation 100 Index, which is tracked by the Invesco NASDAQ Next Gen 100 ETF (QQQJ ).
As experienced investors know, passive ETFs typically rebalance at least once a year. Many do so on a quarterly basis and, broadly speaking, these aren’t seismic events. For the new additions to QQQJ, some or all of those stocks could fuel gains for the ETF going forward.
Indexing History Could Be Important
Many investors know about the Dow Jones Industrial Average and that index’s history of additions and removals. Many stocks that get removed from the Dow go on to outperform the gauge or the stocks added to it.
Similar trends happen with NDX and its history of additions and subtractions. There’s a track record of the stocks being deleted from NDX outperforming those that are added to the benchmark. If that precedent holds true to form this time around, QQQJ could benefit.
“I tracked 77 stocks that were added to the NDX and 62 that were removed since 2010,” noted Rocky White, senior quantitative analyst at Schaeffer’s Investment Research. “The stocks that were removed performed better than those added, especially in shorter-term timeframes. Stocks added to the index in December averaged a return of 3.21% over the next three months. That’s compared to an 8.4% gain for those removed.”
New Stocks in QQQJ
“Over the next three months, about 46% of stocks added beat the NDX, while 56% of the stocks removed beat the index. Looking at one year later, the stocks added to the index averaged a gain of about 13%, with 31% of the stocks beating the overall index. Those figures underperform compared to stocks removed from the index, which averaged a gain of 19% over the next year, with 46% of those stocks beating it,” added White.
For more news, information, and analysis, visit the ETF Education Channel.