The Research Affiliates Deletions Index benefits from long-term price reversal of companies dropped from market capitalization weighted indices.

Market capitalization weighted indices all follow a common pattern. Stocks are added when they are valuable and beloved enough to get on the radar of the investment community. The stocks that are conversely deleted from these indices are almost always unloved, have fallen out of favor, and are no longer valuable enough to be deemed important.

The Research Affiliates Deletions Index purchases stocks that fall out of traditional large/mid capitalization weight indices. Our research shows that these stocks, typically small cap value stocks, outperform the market in the years following their removal.¹

1 Arnott, et al., “Buy High and Sell Low With Index Funds!” [2018]; Arnott, et al., “Reimagining Index Funds” [JOIM, 2023]; Arnott, et al., “Earning Alpha by Avoiding the Index Rebalancing Crowd” [FAJ, 2023]. 

Thoughtfully designed to deliver for investors

Research Affiliates Deletions Index

• Buys recent index deletions
  Traditional market capitalization indices buy high, adding companies to their index that have outperformed the market in the year prior to being added. The Research Affiliates Deletions Index buys low, adding deleted companies that historically outperform the index additions that replaced them in the twelve months following being deleted.
• Takes advantage of long-term stock reversal
  Deleted companies are unpopular, unloved companies trading at deep discounts. They have the potential for outperformance through long-term stock reversal.
• Provides exposure to small cap value stocks
  Recent index deletions are typically small cap value stocks. This approach provides a thoughtful way to gain small cap value exposure by adding recent index deletions that historically have had attractive valuations relative to the market.

Expected 10-Year Excess Return Forecast

Our forecasting models are grounded upon a solid economic foundation. They reflect current market conditions rather than relying simply upon past returns. We use a "building block" approach to forecasting where we estimate key predictors of return for each asset within the index.

• Yield: Steady state return expected from holding index assets (e.g. current yield for bonds and dividend yield for stocks).
• Growth: Return from the expected growth, reflecting increased prices from growing cash flows (e.g. GDP growth).
• Valuation Change: Return assessing the fair value of each asset (whether the asset is cheap or expensive and assuming mean reversion).
• Diversification Return: Return from holding and rebalancing a diversified set of assets.
• Tactical Alpha: Additional return expected from making short-term tactical allocation adjustments.

These building blocks form the core of our 10-year index forecast. To learn more about our forecast methodology, please visit: Research Affiliates Capital Market Expectations Methodology.