A Surprising Market Example
A very interesting example can be seen in the stocks of Salesforce and Exxon Mobil. Both companies were part of the Dow Jones Industrial Average at different times. In August 2020, Salesforce replaced Exxon Mobil in the index. Many investors believed this change would help Salesforce perform better. But the result turned out to be very different from what many expected.
What Happened After the Change
After the replacement, Exxon Mobil actually performed very well. From that point, the stock rose sharply and delivered around 271% gain.
On the other hand, Salesforce struggled during the same period and its price went down by about 32%. This shows that simply entering a major index does not always mean strong future returns.
Why Index Stocks Often Slow Down
When a stock enters a big index, it usually has already gone up a lot before that. Because of this, much of the good news is already priced into the stock. At the same time, many research reports start coming out and ownership by large investors increases. Futures and options trading may also begin. All these factors can make the stock move slowly after it joins the index.
Performance After Leaving an Index
Interestingly, many stocks start performing better after they leave a major index. Once a stock moves out, the attention from big funds becomes lower and the stock gets more room to move. Without the heavy crowd of investors and constant trading activity, the price sometimes starts rising again.
Similar Pattern in the Indian Market
A similar pattern is often seen in India with the Nifty 50 and the Nifty Next 50. When some companies move out of the Nifty 50 and enter the Nifty Next 50, they sometimes begin to perform better. In many periods, the Nifty Next 50 has even delivered stronger returns compared to the Nifty 50.
The Key Lesson for Investors
The main lesson is simple. When a stock enters a big index, a lot of expectations may already be included in its price. This means the easy gains may already be over. The example of Salesforce and Exxon Mobil clearly shows that index changes do not always lead to better performance. Investors should always look deeper instead of assuming that index inclusion guarantees strong returns.
