Long-Term Impact of Russell 2000 Index Rebalancing

Posted: 24 Sep 2008

See all articles by Jie Cai

Jie Cai

Drexel University

Todd Houge

University of Iowa

Date Written: September, 23 2008

Abstract

The study reported here examined the long-term impact of Russell 2000 Index rebalancing on portfolio evaluation. A buy-and-hold index portfolio outperformed the annually rebalanced index in the 1979-2004 period by an average of 2.22 percent over one year and 17.29 percent over five years. Although short-term momentum and the poor long-term returns of new issues partially explain these returns, index deletions were found to provide significantly higher factor-adjusted returns than index additions. Some small-capitalization fund managers appear to capture a portion of these benefits. The strongest performing funds enhanced their factor-adjusted returns by an average of 1.45 percent per year by holding index deletions and/or avoiding index additions. Among the weakest performing funds, higher returns from holding index deletions were offset by the poor returns of new issues added to the index. Thus, index methodology may provide a structural incentive for portfolio managers to drift from their benchmarks.

Keywords: Portfolio Management, Equity Strategies, Private Wealth Management, Mutual Fund Studies, Equity Investments, Other

Suggested Citation

Cai, Jie and Houge, Todd, Long-Term Impact of Russell 2000 Index Rebalancing (September, 23 2008). Financial Analysts Journal, Vol. 64, No. 4, 2008, Available at SSRN: https://ssrn.com/abstract=1272512

Jie Cai (Contact Author)

Drexel University ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-1755 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/CaiJ/

Todd Houge

University of Iowa ( email )

Henry B. Tippie College of Business
Department of Finance, S288 PBB
Iowa City, IA 52242-1994
United States
319-335-3754 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/thouge

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