Excess Return in Equities for Sector ETF Reconstitutions

Using the GICS methodology, MSCI and S&P DJI develop sector indexes that are reconstituted quarterly. ETF investment managers have an incentive to reduce tracking error to their underlying indexes and will buy securities that have been recently included in a reconstitution. I conduct an event study on the price effects of firm inclusion into sector ETFs. I document the existence of pre-inclusion excess return in a sample of stocks added to sector ETFs.