5 Stocks Kicked Off the S&P 500 That Have Outperformed the Index

In the U.S., winners get trophies and parades, while losers go away to think about all that went wrong. So it’s no surprise that in 2020, when Apartment Investment and Management (AIV) was unceremoniously shoved aside to make room for Tesla, Inc. (TSLA) to join the S&P 500 index, it was expected the company’s management would go off into obscurity while Tesla got treated to triumphal front-page reporting.

Yet, in the six months after Tesla replaced it, AIV had an 80% better relative return. While AIV, like the rest of the real estate industry, later struggled as interest rates spiked in the early 2020s, its stock price is still up about 60% since then. And AIV isn’t alone. While newly crowned S&P 500 companies often strain under the weight of expectations, the outcasts have historically outperformed the market by as much as 5% annually over the following five years.

It’s a reminder that in investing, as in sports, sometimes the most compelling comeback stories begin with a setback. In this article, we tell the tale of five of those companies—each of which has outperformed the index since leaving it. We also undo some of the myths still out there about the price bumps companies can expect when joining the S&P 500 index.

What Happens When the S&P 500 Adds or Removes Stocks From the Index?

Getting booted off an index isn’t something associated with success. Being included, particularly today when so much of the market is given over to passive investing, is said to improve one’s share price, all but automatically. It also increases the company’s visibility and credibility, showing everyone that the company is one of the best and biggest in the country.

However, there could be a silver lining to getting dumped. Research supports the idea that many companies removed from the S&P 500 index outperform the market. A key study conducted by Research Affiliates found that stocks taken out of the S&P 500 between 1990 and 2022 outperformed those that were added by over 5% annually in the five years afterward. The authors of the study argued that this outperformance is partly driven by how the outcasts are immediately undervalued because of excessive selling after being dropped​.

These and other researchers speculate this pattern is mainly triggered by the recognition that additions are overpriced and deletions are undervalued. Heavy buying activity eventually creates a situation where companies added to the index trade on price-to-earnings ratios that are too frothy, causing investors to dump them.

In addition, after the initial decline, stocks kicked out of indexes tend to be excessively punished by the market. Over time, they recover and can provide better returns, as the market eventually corrects its overreaction​. This suggests that while being removed from the index initially harms share prices, some companies bounce back as contrarian investors step in, finding value in these beaten-down stocks.

The “Index Effect”

But there’s another reason stocks that are dumped by the S&P 500 might be counterintuitively doing well afterward. People on Wall Street tend to repeat claims about an “index effect” that’s no longer operative. In other words, if it’s not true that those joining the index see much of a bump in their stock price in the first place, then it follows that those leaving it will often have a better performance, all else being equal.

Still, the oft-repeated story about the stock price benefit of joining the S&P index seems perfectly logical. Joining the S&P 500 should profoundly influence share prices when you consider the index’s role in modern investing. The world’s most widely tracked index has trillions of dollars invested in funds that track its performance. Anyone who joins it sees its stock bought up by hundreds of index funds and exchange-traded funds (ETFs). When a stock gets removed, those funds must sell it. This automatic trading should create significant price swings.

The impact should go beyond this since being in the S&P 500 is like having a spotlight on your company. It brings increased visibility, media coverage, and analyst attention. Companies that join the index often see a boost in their public image and credibility—it’s like joining the major leagues of American business.

On the other hand, being removed from the index can be seen as a red flag that a company is old news, which should lead to a snowballing of negative sentiment and lower investor confidence.

Taking this all together, it’s said to be inevitable that removal from the S&P 500 will cause a company’s share price to fall, especially in the initial few months. For that reason, various pundits recommend steering clear of these stocks, including CNBC’s Jim Cramer.

“When you see a stock that gets expelled from the S&P 500, please don’t bother to try to catch a bottom—you’re most likely catching a falling knife,” Cramer said. “Historically, the odds are very much against you. If Standard & Poor’s doesn’t want them, well, you probably shouldn’t want them either.”

The “Index Effect” Catches the Falling Knife

But like many stories taken to be so obvious on Wall Street, the numbers tell another tale. As research from the National Bureau of Economic Research shows—backed up by other deep dives into the data—there once was a strong index effect. In the 1980s and 1990s, stocks added to the S&P 500 had strong, positive, and abnormal returns (about 3.4% in the 1980s and 7.6% in the 1990s).

Meanwhile, stocks removed from the index had steep declines—about -4.6% in the 1980s and -16.6% in the 1990s.

However, studies started appearing in the 2000s showing a massive decline in these effects. By the 2010s, stocks added to the index had only a small 0.8% rise—some studies had it at a minuscule 0.1%—and stocks removed from it had almost no abnormal returns (-0.6%). In the 2020s, the differences between being in and out of the index, all else being equal, seems to be pretty close to statistically insignificant.

How could this be? After all, it’s true that there should be higher demand for stocks that are added to the index. Analysts have suggested several reasons:

• Market efficiency: The market has become more efficient at accommodating the demand shocks created by index changes. Institutions provide liquidity more effectively when these changes happen, reducing price pressure.
• Increase in migrations: Perhaps most persuasively, some argue that it’s not like companies go from being in no index at all to being in the S&P 500. A large percentage of index changes involve companies moving between the S&P MidCap 400 and the S&P 500, rather than completely new companies being added or removed. This causes offsetting trades from index-tracking funds, leading to smaller net demand shocks.
• Predictability: With the growth of indexation, index changes have become more predictable, leading arbitrageurs to front-run index announcements. This anticipatory trading reduces the price impact when the actual change occurs.
• Market liquidity: Liquidity in the stock market has improved considerably, with bid-ask spreads falling significantly. This increase in liquidity has allowed the market to absorb large trades more efficiently, further reducing the price impact of index changes.

Why Does the S&P 500 Add or Remove Stocks From the Index?

The S&P 500 is set up to represent the largest and most influential companies in the U.S. economy. To maintain its status, the index must adapt to changes in the market by adding companies that better reflect the economic landscape and removing those that no longer meet the criteria. This selection process is overseen by a committee at S&P Global, which meets quarterly to evaluate companies in the index and make adjustments as needed.

To be considered for the S&P 500, a company must meet several requirements:

1. An unadjusted market cap of at least $18 billion.
2. At least 10% of shares are available to the public.
3. Positive earnings in the earlier four quarters.
4. Adequate liquidity.
5. Be a U.S. company.
6. Be a publicly traded company for at least 12 months.
7. Contribute to the balance of sectors held within the index

Meeting these requirements, however, doesn’t guarantee inclusion; the S&P 500 committee exercises discretion to ensure companies selected are truly representative of the large-cap U.S. market.

More immediate action can also be taken if, for example, a company is taken over or delisted, or if it files for bankruptcy. In such cases, the stock would be immediately removed from the S&P 500 and replaced with another company.

5 Stocks Removed From the S&P 500 That Have Outperformed the Index

By now, we shouldn’t be so surprised that stocks that have been dropped by the S&P 500 have gone on to do well. But which companies are the standouts in this category? Here are a few, featuring share price performance data as of market close on Nov. 6, 2024:

• Removal date: March 18, 2024
• Share price performance since exclusion: 52%
• S&P 500 performance since exclusion: 15%

Sentiment in regional banks took a hit in 2023 after Silicon Valley Bank and First Republic went out of business. Salt Lake City-headquartered Zion Bank got caught in the crossfire, shedding value and eventually getting kicked out of the S&P 500.

Zion’s downtrend turned out to be short-lived. An improving economic outlook and the U.S. Federal Reserve’s move to cut interest rates have since boosted the sector, along with Zion. In fact, Zion’s stock began its rally around October 2023, when news started spreading that it may get the boot.

• Removal date: Sept. 18, 2023
• Share price performance since exclusion: 42%
• S&P 500 performance since exclusion: 33%

A challenging couple of years for Lincoln Capital led its share price to plummet and market cap to fall way below the S&P 500’s threshold. The life insurer was another firm affected by Silicon Valley Bank’s collapse. It also faced an uptick in pandemic-related mortalities and a host of other challenges, all of which weighed on its balance sheet and left it in a precarious financial position.

The company has since been in recovery mode. Business has been improving, management has a better handle on costs, and investors have begun to notice, bidding the once-downtrodden shares up significantly over the past year.

• Removal date: March 20, 2023
• Share price performance since exclusion: 262%
• S&P 500 performance since exclusion: 51%

Lumen Technologies has come some way since getting booted from the S&P 500 in March 2023. A previous decision to shun the wireless market to expanding its wireline business through mergers and acquisitions was hurting its bottom line. The telecom company ended up saddled with debt and forced to suspend its dividend, prompting shareholders to bolt, its market capitalization to shrink, and its status as an S&P 500 company to disappear.

Lumen is working to boost its enterprise offerings, with a specific focus on large and midmarket enterprises in North America, and leveraging new partnerships to support AI network capacity. However, the explosion in artificial intelligence (AI) and a series of contract wins, including with Microsoft Corp. (MSFT), boosted sales and got investors cautiously optimistic again about the company’s prospects.

• Removal date: Sept. 19, 2022
• Share price performance since exclusion: 68%
• S&P 500 performance since exclusion: 54%

PVH is a cyclical stock known for its volatility. The owner of brands that include Calvin Klein and Tommy Hilfiger, it’s had a rough few years facing changes in consumer tastes, the post-pandemic hike in interest rates, and widely shared problems in the retail clothing market.

Now that borrowing costs are falling and recession fears are easing, investors are once again looking at the company and its diversified portfolio of well-known, popular brands. The company’s broad global reach, cost discipline, investment in technology, and depressed valuation have also helped revive interest in the stock.

• Removal date: Dec. 21, 2020
• Share price performance since exclusion: 79%
• S&P 500 performance since exclusion: 61%

We now return to where we began, with Apartment Investment and Management, which was replaced by Tesla in the S&P 500 at the end of 2020. Tesla is a much better-known stock, but AIV has, at times, been the better performer.

The real estate investment trust acquires, manages, and redevelops residential apartments, and has been benefiting from rising demand for real estate and falling interest rates. 

The Bottom Line

When a stock gets removed from the S&P 500, some investors think of heading for the exits—but this knee-jerk reaction could mean leaving money on the table. While conventional wisdom suggests avoiding these corporate outcasts, historical data reveals a surprising twist: companies removed from the index have often staged impressive comebacks, overall outperforming the market by as much as 5% annually in the five years following their removal.

This counterintuitive pattern highlights a fundamental principle of investing: the best opportunities often emerge when everyone else is running in the opposite direction. While getting booted from the S&P 500 can trigger automatic selling by index funds and negative headlines, it can also force companies to make tough but necessary changes. These stocks often trade at far less than their previous highs, meaning less optimism is priced in and there’s more potential upside if the company turns things around.