What is the 'S&P Phenomenon'

The S&P phenomenon is the tendency of stock to show a temporary price increase immediately following its addition to the S&P 500, a major US market index.

Breaking Down 'S&P Phenomenon'

The S&P phenomenon occurs when index funds and other investment vehicles tracking the Standard & Poor’s 500 Index (S&P 500) buy stock immediately after the S&P 500 added it to its index. The surge in buying puts upward pressure on the stock’s price. The price increase is mostly temporary, settling back down after S&P-related buying has subsided.

The S&P 500 is a market value weighted index of 500 of the largest publicly traded US companies by market value, or market capitalization. It is the most popular market index for an index fund to track. The bulk of investors and analysts consider it the most accurate single indicator of the state of the large-cap US equities market. The S&P 500’s overwhelming popularity is the reason additions to the index have a large, measurable effect on prices.

The index is maintained 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 to the index.

Criteria for Addition and Removal from the S&P 500

Every year, several US companies gain or lose a place in the S&P 500 Index. For a company to qualify for inclusion in the index, it must satisfy certain criteria. It must be a US-based company, with at least 50 percent of its stock traded on the active exchange, high liquidity, positive earnings and good credit. Of course, companies must maintain high market capitalization. As of 2018, the cut off is $6.1 billion.

Removal from the index typically results from mergers, acquisitions or changes to an indexed company that violates one or more of the eligibility criteria. Additions typically result from a need to fill a gap following a removal. For example, in June 2018, the S&P 500 removed Time Warner from the index following its acquisition by AT&T, already an S&P 500 company. To fill the gap left by Time Warner, the S&P 500 took on FleetCor Technologies.

Right on cue, the S&P phenomenon took effect. Immediately following the announcement that FleetCor would join the S&P 500, the company saw a 6.45% jump in the price of its stock. A week later, the S&P phenomenon had dissipated, and the stock’s price settled closer to, but still marginally higher than, its pre-announcement price.

RELATED TERMS
  1. Index Futures

    Index futures are contracts based on a financial index, which ...
  2. S&P 500/Citigroup Value Index

    The S&P 500/Citigroup Value Index is a market-cap-weighted index ...
  3. S&P 500 Buyback Index

    S&P 500 Buyback Index is an index designed to track the performance ...
  4. S&P 500/Citigroup Growth Index

    S&P 500/Citigroup Growth Index is a market capitalization-weighted ...
  5. Active Index Fund

    Active index funds track an index fund with an additional layer ...
  6. Index Option

    An index option is a financial derivative that gives the holder ...
Related Articles
  1. Investing

    S&P 500 Index: A Performance Analysis of Long-Term Returns

    Discover how to gain insight into the returns generated by the S&P 500 Index over the long term and how this can assist your investment goals.
  2. Insights

    The S&P 500: The Index You Need To Know

    Just how are companies added to and dropped from the S&P 500, and how is its value calculated? Curious? Read on.
  3. Insights

    5 Famous Companies Dropped From the S&P 500

    Learn about some of the more famous names that have been removed from the S&P 500 and the circumstances surrounding their removal.
  4. Investing

    S&P 500 Index: A Revenue Case Study

    Discover the breakdown of aggregate total revenue of S&P 500 companies, including how much revenue is earned by country, industry and geographic location.
  5. Investing

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  6. Investing

    Why S&P 500 Stocks May Rebound 6% Short Term

    The index is down almost 8.5% from highs seen in late January.
  7. Investing

    SSO vs. UPRO: Comparing Leveraged U.S. Equity ETFs

    Discover how the leveraged exchange-traded-fund SSO compares to UPRO, and determine which one is the right fit for your portfolio in a bull market.
  8. Investing

    5 Things You Need To Know About Index Funds

    Index funds, at their best, offer a low-cost way for investors to track popular stock and bond market indexes. But not all index funds are created equally.
  9. Insights

    This Bull Market Is Supported by the Index Funds Investment

    The massive growth of index funds has been supporting the bull market and could lead to a steeper correction when it happens.
  10. Investing

    3 Index Funds with the Lowest Expense Ratios

    Learn about index mutual funds with the lowest expense ratios.
RELATED FAQS
  1. Why do investors use the S&P 500 as a benchmark?

    Learn about the advantages and disadvantages of using the S&P 500 as a benchmark for portfolio performance, and understand ... Read Answer >>
  2. How can I buy an S&P 500 fund?

    Looking for access to the S&P 500? Learn how to access an S&P 500 index fund or ETF. Read Answer >>
Trading Center