The issue with backtesting this sort of thing is the data: - Was survivorship bias accounted for? If you don't have a list of stocks that includes dead issues

The issue with backtesting this sort of thing is the data: - Was survivorship bias accounted for? If you don't have a list of stocks that includes dead issues (bankrupt, merged, or closed) then all your value stocks will be the ones that had a bad period and then miraculously recovered. Your backtest would buy those and make money, while not seeing the ones that had a bad period and then went to zero. This also means you have to track whether the stock was tradable, whether due to the exchange announcing a freeze, or the market just seizing up as participants decided not to risk much. If your strategy does shorting this is going to cause even more pain as you look for historical hard-to-borrow data. - Was the data backfilled? This is the hardest one to drag out of data sales people, because they often just don't get it. If I have a company that reports its Q2 earnings about six weeks into Q3, is the data labelled as coming out in Q2? Because if it is, I'm backtesting on future information. Also firms that are in trouble may also have timeliness issues in getting their numbers out. The real reason why the index effect is gone is actually simple. For years now there's been a bunch of traders who build their models around the effect. Their methods are common sense: screen the market for firms that are not yet in the index, and rank them according to how likely they are to get included. Buy a lot of what you're certain will get in, a bit less if you're less certain, and so on. The effect of this is to give you a smoothed out effect so that you can't just hop on board right before inclusion anymore. It also seems likely that the big index investors actually hire a few of these experts to optimize their purchases. In fact I had a chat with a guy who did this yesterday. It turns out to follow an index, you don't need to buy the whole index. Stocks tend to move together so you can cover most of the principal components with just a tiny amount of stocks. You're not going to do this by buying the little stocks at the bottom of the index, you buy the big ones at the top.