When comparing names entering the AMZ versus AMZI, a completely different story unfolds. On average, names entering the AMZ end up underperforming the index by 15 bps by the end of the time period. Names entering the AMZI, on the other hand, outperform by 465 bps! This left us pretty confused, so we broke the data down further.
We decided to look at how many names outperformed the index on announcement date and continued to outperform the index through the day after rebalancing (“Outperform, Outperform”), how many names outperformed the index on announcement date but ended up underperforming the index through the day after rebalancing (“Outperform, Underperform”), and so on for names initially underperforming.
On an absolute basis by count, 75% of the time, names that enter the AMZI will outperform on the announcement date and that outperformance will magnify through the day after rebalancing (“Outperform, Outperform”). The data seems to be less conclusive for names entering the AMZ, as it was more or less equally as likely for the name to be in one of the four scenarios.
To be thorough, we decided to look at one more variable: quarterly versus special rebalancings. Here again, in both types of rebalancings, names entering the AMZ narrowed in outperformance whereas names entering the AMZI widened in outperformance. But the outperformance was much more magnified for AMZI special rebalancings to show an outperformance of 838 bps versus the index. One possible explanation for the magnified AMZI outperformance is that the time period from announcement date to rebalancing date is much shorter for special rebalancings versus quarterly rebalancings, so it may not be enough time for the market to readjust. But that still doesn’t explain why the AMZ doesn’t perform similarly.
To recap :
The verdict? Based on history…
- Names entering the AMZI are likely to outperform the day Alerian announces they will be added and are likely to continue outperforming through the day the index is rebalanced. This effect is further magnified for AMZI special rebalancings.
- Names entering the AMZ are likely to outperform the day Alerian announces they will be added but that outperformance narrows through the day the index is rebalanced, in fact below pre-announcement levels. This effect is somewhat muted for AMZ special rebalancings.
Even though these are the results, we’re still perplexed why the results are opposite for the two indices. Yes, AMZI has more AUM tracking it. But if anything, the effect for AMZ should just be a muted version of the AMZI, not the opposite effect. I’m curious to hear your thoughts at email@example.com.
In Part 4, we’ll apply this same time period study to names exiting the two indices. (Sneak preview: the results differ from this study on entering names.)