Masters in Business · Wednesday, September 2, 2026
Rob Arnott highlights the costly 'flip-flop' phenomenon in index inclusions and deletions, where stocks added to indexes often underperform after their peak, and stocks deleted and later re-added also show significant underperformance prior to re-entry. This cycle results in substantial losses for index funds that must buy high and sell low.
“On average, stocks that are added are added after 75 percentage points of outperformance. If they falter and are kicked back out, they're removed at a 7,000 basis point loss.”
“The deletion flip-flops, stocks that are deleted and re-added, are even more dramatic. They underperform by 3,500 basis points, give or take, in the year before they're dropped. And then they outperform by 180 percentage points. They roughly triple relative to the market before they're added back in.”
“Flip-flops are very, very costly.”