What is the S&P Phenomenon?

The S&P phenomenon is the tendency for stock to temporarily rise following the announcement of its addition to the S&P 500 Index. This is attributed to mutual funds and exchange traded funds that mimic the S&P 500 Index buying the stock for their portfolios. Inclusion in the index may also provide a temporary boost from retail buying.

Key Takeaways

  • The S&P phenomenon is a temporary increase in the price of a stock upon the announcement of its inclusion in the S&P 500 Index.
  • This occurs because the index is widely tracked by institutional investors. When a stock is added, funds that follow the index buy the stock.
  • The S&P 500 is considered one of the most accurate indexes for tracking large-cap U.S. equities.

Understanding the S&P Phenomenon

The S&P phenomenon occurs when index funds and other investment vehicles tracking the S&P 500 Index buy a stock upon the announcement of its inclusion to the index. The buying surge puts upward pressure on the stock. The price increase is mostly temporary, settling down after S&P-related buying subsides.

The S&P 500 is a capitalization weighted index of the largest publicly traded U.S. companies by market value. It is the most popular benchmark for index funds, as it is considered the single most important barometer of the state of large-cap U.S. equities. The S&P 500's overwhelming popularity is the reason additions to the index have a measurable impact on prices. S&P Global estimates that $11.2 trillion in assets is indexed or benchmarked to the S&P 500 Index.

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.

Criteria for Addition and Removal from the S&P 500

Every year, several U.S. companies gain or lose a place in the S&P 500 Index. For a company to qualify for inclusion, it must be a U.S.-based company traded on a U.S. stock exchange and have high liquidity, positive earnings and good credit. The companies must maintain high market capitalization. As of December 2020, the cut off was $9.8 billion.

The S&P 500 launched on March 4, 1957.

Removal from the index typically results from mergers and acquisitions or changes to an indexed company that violates one or more eligibility criteria. Additions typically result from a need to fill a gap following a company's removal.

Real-World Example of the S&P Phenomenon

In June 2018, Time Warner was dropped from the index following its acquisition by AT&T (T), which was already an S&P 500 company. To fill the gap, FLEETCOR Technologies (FLT) was added.

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. The stock's price settled lower, but remained marginally higher than its pre-announcement price.