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Snapchat Inc. (SNAP - Free Report) has been hitting headlines in recent weeks with a wave of bad news as its shares hit an all-time low of $13.07, tumbling more than 25% over the past one month. In fact, the stock is currently trading 23% below its IPO price. The latest setback came when the social media network was dumped from the S&P 500 Index due to changes in the S&P Dow Jones Indices methodology.

As per the new rule, companies with multiple share classes would no longer be eligible for inclusion in the S&P Composite 1500 and related indices, including the S&P 500. This is because companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues. In other words, they offer shares with no voting rights.

However, the new policy does not apply to existing components of the S&P 500, including Facebook (FB - Free Report) , Alphabet (GOOGL - Free Report) and Berkshire Hathaway (read: Tech ETFs to Tap on Facebook's Solid Q2).

The move is similar to the decision of the FTSE Russell, which includes the Russell US indexes and FTSE Global Equity Index Series. This dealt a major blow to Snap shares last week. The index provider also underwent a rule change for the inclusion of its constituents. It will now include new companies in its indexes that will have at least 5% of their voting rights in the hands of public shareholders. Snap does not fulfil this criterion and thus will not be given a place by FTSE Russell. Notably, the Snapchat messaging app has an unusual share structure that denies voting rights to its investors.

Restricted ETFs

Given this, Snap could miss out on a growing pool of wealth, as more investors invest in index funds and passive funds over active funds. This is especially true as Snap is unlikely to find its entry into some of the blue chip ETFs like SPDR S&P 500 ETF (SPY - Free Report) and iShares Core S&P 500 ETF (IVV - Free Report) that are sizzling this year on solid corporate earnings and improving macro fundamentals. Both funds are the largest and the most popular in the ETF space with AUM of $2492.9 billion and $122.0 billion, respectively (read: Why You Should Bet on Blue Chip ETFs Now).  

The FTSE Russell decision would restrict Snap’s inclusion in other blue chip ETFs tracking the similar indexes like the $19.2-billion iShares Russell 1000 ETF (IWB - Free Report) .

Additionally, Snap is also not likely to pave the way in the Technology Select Sector SPDR Fund (XLK - Free Report) , which tracks the Technology Select Sector Index – a family of the S&P Composite 1500 index – and has AUM of $17.1 billion. The sector has been on fire and the best performing space this year amid concerns over stretched valuations. A rising rate environment, improving industry fundamentals, and emerging technologies such as wearables, VR headsets, drones, virtual reality devices, and artificial intelligence are the key catalysts to the sector’s growth.

The S&P rule change will also keep Snap away from the roster of many other popular ETFs including SPDR S&P Midcap 400 ETF (MDY - Free Report) and iShares Core S&P Small-Cap ETF (IJR - Free Report) . MDY tracks the S&P MidCap 400 Index having accumulated $19.3 billion in its asset base, while IJR follows the S&P SmallCap 600 and has AUM of $31.4 billion (read: ETFs to Win or Lose Post June Jobs Data).

Similarly, the ultra-popular $35.3 billion iShares Russell 2000 ETF (IWM - Free Report) and $15.6 billion iShares Russell Mid-Cap ETF IWR will also not hold Snap.

A Look to ETFs with Snap

Snap is currently present only in a handful of ETFs and will continue to be in their holdings. Below, we have highlighted the details:

Global X Social Media Index ETF (SOCL - Free Report) : This ETF targets the global social media space by tracking the Solactive Social Media Index and holds 34 securities in its basket with Snap accounting for 2.81% share. It has a Zacks ETF Rank of 1 or ‘Buy’ rating with a High risk outlook (read: Social Media ETF Nosedives With Twitter's Weak User Growth).

Renaissance IPO ETF (IPO - Free Report) : This fund also provides exposure to the largest and most-liquid newly listed companies by tracking the Renaissance IPO Index. Holding 45 stocks in its basket, Snap accounts for 2.2% of the portfolio.

First Trust US Equity Opportunities ETF FPX: This ETF targets the U.S. IPO market and follows the IPOX-100 U.S. Index. It holds 103 securities in its basket with a meager 0.9% allocation in Snap (read: IPO Market Back On Track: ETFs to Tap).

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