|
Page 3 of 7
Exhibit 4 plots the average monthly excess returns from January 1994 to May 2009. The monthly average excess return for July is statistically significant at a 95% confidence level, providing a strong relationship between the annual June rebalancing and the excess return.
Exhibit 4. Average Monthly Excess Return
Source: Standard & Poor’s. Data from January 1994-December 2008.
The July effect may moderate over time as Russell has made enhancements to its rebalancing process in order to lessen its impact. For example, eligible initial public offerings (IPOs) are now added to the Russell 2000 on a quarterly basis. However, the July effect alone does not provide sufficient evidence for the S&P SmallCap 600’s outperformance. Exhibit 5 examines the indices’ excess return by calendar year. As the last column indicates, the distribution of relative outperformance is spread throughout the year. This distribution suggests that the July effect alone may not account for the S&P SmallCap 600’s excess return.
Exhibit 5. Excess Return By Calendar Year
Source: Standard & Poor’s. Data from January 1994-December 2008.
To further segregate the relative performance while controlling for the July reconstitution effect, a hypothetical Russell 2000 index was created in which the month of July returns are represented by the S&P SmallCap 600’s returns. Therefore, the return differential between the S&P SmallCap 600 and the hypothetical Russell 2000 index should represent any effect other than the reconstitution effect. Exhibit 6 shows the growth of US$ 1 in the S&P SmallCap 600, Russell 2000 and the hypothetical Russell 2000 index.
Exhibit 6: Controlling For The Reconstitution Effect
|
RSS
