Index Rebalancing and Long-Term Portfolio Performance

27 Pages Posted: 20 Mar 2007

See all articles by Jie Cai

Jie Cai

Drexel University

Todd Houge

University of Iowa

Date Written: March 2007


We examine how index additions and deletions affect long-term benchmark performance. Studying changes to the small-cap Russell 2000 index from 1979-2004, we find that a buy-and-hold portfolio significantly outperforms the annually rebalanced index by an average of 2.22% over one year and by 17.29% over five years. These excess returns result from strong positive momentum of index deletions and poor long-run returns of new issue additions. We also document the influence of index changes on small-cap equity fund returns. Index deletions enhance the benchmark-adjusted returns of the strongest performing funds by an average of 1.45% per year. Among weaker performing funds, the benefits from holding index deletions are offset by the poor returns of new issues added to the index, which the stronger performing funds generally avoid.

Suggested Citation

Cai, Jie and Houge, Todd, Index Rebalancing and Long-Term Portfolio Performance (March 2007). Available at SSRN: or

Jie Cai (Contact Author)

Drexel University ( email )

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


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)