What is the S&P phenomenon?
The S&P phenomenon is the stock’s tendency to rise temporarily following the announcement of its addition to the S&P 500 Index. This is attributed to mutual funds and exchange traded funds who mimic the S&P 500 index by buying the stocks for their portfolios. Inclusion in the index can also provide a temporary boost to retail buying.
Key points to remember
- The S&P phenomenon is a temporary increase in the price of a stock upon announcement of its inclusion in the S&P 500 Index.
- This happens because the index is widely followed by institutional investors. When a stock is added, funds that track the index buy the stock.
- The S&P 500 is considered one of the most accurate indexes for tracking large-cap US stocks.
Understanding the S&P phenomenon
The S&P phenomenon occurs when index funds and other investment vehicles that track the S&P 500 index buy a stock immediately upon announcement of its inclusion in the index. The surge in buying is putting upward pressure on the stock. The price increase is mostly temporary and leveled off after the end of S&P related buying.
The S&P 500 is a capitalization-weighted index of the largest publicly traded US companies by market value. It is the most popular benchmark for index funds, as it is considered the most important barometer of the state of large cap American stocks. The overwhelming popularity of the S&P 500 is why additions to the index have a measurable impact on prices. S&P Global estimates that $11.2 trillion in assets are indexed or referenced to the S&P 500 Index.
The index is managed by the S&P Index Committee, which includes Standard & Poor’s economists and index analysts. This team meets regularly to monitor the index and to consider and implement changes.
Criteria for adding and removing from the S&P 500
Each year, several US companies gain or lose a spot in the S&P 500 Index. For a company to be eligible for inclusion, it must be a US-based company, listed on a US stock exchange and have high liquidity, positive earnings and good credit. Companies must maintain a high standard market capitalization. As of December 2020, the threshold was $9.8 billion.
The S&P 500 was launched on March 4, 1957.
Removal from the index is usually the result of Mergers and Acquisitions or changes to an indexed company that violates one or more eligibility criteria. Additions generally result from a need to fill a void following the deletion of a business.
Concrete example of the S&P phenomenon
In June 2018, Time Warner was removed from the index following its acquisition by AT&T (J), which was already an S&P 500 company. To fill the void, FLEETCOR Technologies (FLT) was added.
Just at the right time, the S&P phenomenon took effect. Immediately after the announcement that FLEETCOR would join the S&P 500, the company saw its share price jump 6.45%. A week later, the S&P phenomenon had dissipated. The stock price stabilized lower, but remained slightly above its pre-announcement price.