TransWikia.com

When does the buying happen after inclusion in S&P500?

Personal Finance & Money Asked on July 31, 2021

As I understand it, inclusion of a company in the S&P500 means all ETFs that track the S&P, and some of their derivatives, must buy stock in that company. I would expect this to be a noticeable boost to the share price in the short term – the funds must buy at any price, after all.

Last week, 3 companies were added to the S&P 500. Of these, 2 experienced a brief jump on Monday, then went on to noticeable losses. It might be because both are gambling companies, but it still seems strange to see them fall so much right before inclusion in an index fund.

Is it because ETFs only start buying on the official date (next Monday?). Are the tracking funds allowed to buy in advance, spreading out the price variations?

One Answer

You are assuming that a stock will jump after the inclusion into an index is announced. However there is some issues with your assumption:

  • Inclusion is not immediate. For many indexes there is a time between the announcment of the inclusion and the actual inclusion
  • People might expect inclusion of certain stocks and buy them to bet on an index inclusion effect. This will inflate the price already long before the inclusion is announced. These people will also sell off their shares after the inclusion
  • The S&P500 is a market cap weighted index. This means that a newly included stock will typically have a low weight in the index.
  • Therefore the tracking error of not including the stock immediately is often small
  • Funds do not always rebalance their portfolio immediately. Many will have monthly or quartely rebalancing of the portfolio to reflect inclusions
  • Index funds are not the only players and index inclusion is not the only thing happening these days. Everyday's volatility might just cover the index inclusion effect

Correct answer by Manziel on July 31, 2021

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP