Nasdaq-100 Rebalance Trade That No One Talks About

Next week, six companies will be replaced in the Nasdaq-100 Index (NDX) for its annual reconstitution. The NDX tracks the 100 largest non-financial companies listed on the Nasdaq Composite (IXIC). The tables below outline the stocks being added and removed, along with their 2025 returns and current brokerage sentiment data from Zacks. I believe these changes can offer insight into where these stocks are headed. In the article below, I’ll make that case using historical data from past additions and removals                         

Additions vs. Removals 

Since 2010, I've tracked 83 stocks added to the NDX and 74 removed. Some securities are excluded due to unavailable data. Also, I'm only considering the stocks added and removed in December during the annual rebalancing. I’m not considering stocks being eliminated and added mid-year due to bankruptcy, mergers, etc.

My theory is that removal from the index could be a sign of, or even contribute to, a culmination of negative sentiment towards the stock. That process may lead to overselling, which could have bullish implications going forward. Conversely, stocks added to the index may underperform for opposite reasons.

The tables below show stock returns for stocks added to and removed from the NDX since 2010. The returns are from the day they were added or removed and then over the next month to one year. The stocks removed from the index (second table below), outperformed the stocks added at each time frame by average return. Buying stocks removed from the index generated an average return of 17.8% over the following year, compared with less than 12% for stocks added.

In either case, the index was more likely to outperform the stocks. However, 46% of the stocks removed beat the NDX over the next year and only 30% of the stocks added beat the index over the next year. Overall, the data below supports my theory.

Extreme Sentiment Cases

Next, I examined brokerage sentiment on the day each stock was added or removed, based on Zacks analyst ratings. The first table highlights stocks added to the index with very bullish sentiment, while the second shows stocks removed with extremely negative sentiment.

Stocks added with high expectations underperformed big time. Among the 19 stocks added with at least 80% of analysts rating them a "buy," the average 12-month return was just 3.5%, and only 16% outperformed the NDX.

The stocks removed with extreme negative sentiment didn’t show as much outperformance as I expected. There were 12 stocks meeting the criteria. Their average return over the next year was an impressive 30% but this figure was buoyed by Netflix (NFLX) in 2012, which was removed with negative sentiment and went on to gain over 300% for the next year (it has since been added back to the index).

Based on historical data, investors should be cautious with stocks being added to the Nasdaq-100, as they have tended to underperform the index in the year following inclusion. The stocks being removed from the index are by no means a sure thing, but they seem to have more upside potential.