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  • (0:20) – New Rules for the S&P 500: Why is This Important?
  • (1:45) - SNAP Gets Barred From the S&P 500
  • (4:00) – Impact on Other Companies and IPOs
  • (5:30) - Ulta Compared to Snapchat: Why Indexes Matter
  • (7:20) - Episode Roundup: Podcast@Zacks.com

After an IPO, one of the big steps for a company is its inclusion in major market indexes, such as the S&P 500. Getting added to a benchmark puts a company in focus, and it can have a decent impact on the actual stock too. That is because it basically results in forced buying of stocks, as funds tracking the indexes have no choice but to buy those that have been added, and remove those that have been ejected out of a benchmark.

While you might think this is a small detail, more than three trillion dollars are in passive investments these days, and SPY alone has more than a quarter trillion dollars in assets. Add in the other two major ETFs tracking the S&P 500—VOO and IVV—and you are approaching half a trillion dollars that is directly based on this single benchmark, and that doesn’t even include mutual funds). With these kinds of numbers, you can see why this might be a big deal to a company, and why it can definitely help to reduce supply of a given stock (and thus have a positive impact on the price).

But getting into indexes is by no means a guarantee, as many index providers have criteria for including firms into their benchmarks. This can include trading levels, size, location of headquarters, and now, can include share class structure too.

This Week’s Podcast Topic

In today’s podcast, we take a closer look at this issue of multiple share classes and how some companies in particular might be impacted by the rules. Snapchat’s parent Snap (SNAP - Free Report) is especially in focus due to these rules, as the company’s multiple share classes—and issuance of non-voting shares to the public—is preventing the company from ascending to the S&P 500, among other benchmarks.

Thus, SNAP will not see the benefit from the forced index buying that many of its peers do. This is actually a huge deal, at least if we look to similarly-sized companies as a guide.

Ulta

SNAP is relatively comparable to Ulta Beauty (ULTA - Free Report) , at least in terms of market cap. Plus, both are often considered growth stocks, so it is a decent enough proxy.

For ULTA, the company makes up roughly seven basis points of the fund. That doesn’t sound like a lot—and it certainly isn’t compared to the blue chip giants out there—you have to remember how much money is in SPY and similar funds. Since there is such an enormous pool of money, SPY ends up owning about one percent of all the ULTA shares (according to Morningstar).

But that is just SPY, there are plenty of other funds out there and the top 20 holding funds (according to Morningstar) account for more than a quarter of all the Ulta shares! Obviously, this is a huge percentage, but it doesn’t even scratch the surface of the fund and index impact on the company.

And while SNAP won’t miss out on everything, it does seem doomed to miss out on many of the major indexes from not just S&P, but FTSE Russell as well. This is definitely something for investors to consider, and it could have repercussions for others in the market too.  

 Other Factors

Investors should note that some of the more famous multi-share class companies, such as Facebook (FB - Free Report) , Alphabet (GOOGL - Free Report) , and Berkshire Hathaway (BRK.B - Free Report) , will not be impacted by these new rules, as they will be grandfathered in. However, new companies like Snap or the three share class Blue Apron could be in trouble.

Make sure to listen to today’s podcast for more information about this issue, and why it could have ramifications for plenty of tech companies and IPOs down the line too. Many aren’t going to want to miss out on this gigantic pool of money, and it may force some positive changes as a result.

Bottom Line

But what do you think about SNAP and the indexes? Are index providers taking a step too far? Make sure to write us in at podcast @ zacks.com or find me on Twitter @EricDutram to give us your thoughts on this, or anything else in the fund market.

But for more news and discussion regarding the world of investing, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!

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