The S&P 500 and the Nasdaq-100 indexes get new members added and old ones kicked out on Friday in a quarterly rebalancing mostly based on companies’ adjusted market capitalization.
Years ago, these index reconstitutions had very little impact on trading.
Not anymore.
The explosion of index-based ETFs has changed all that.
Today, roughly $16 trillion is indexed to the S&P 500.
The largest Nasdaq-100 ETF (QQQ), has $321 billion in assets, and the Invesco Nasdaq-100 Index mutual fund (IVNQX) has about $100 billion in assets, so we are talking well north of $400 billion in additional assets pegged to the Nasdaq-100.
Bottom line: what stocks are added to or deleted from these large indexes matters a lot.
Palantir gets its wish
If you doubt that being included in a large index matters, just ask Palantir Technologies. It apparently believes it is very important.
On November 14, the company issued a three-sentence (!) press release announcing that it was transferring its listing from the New York Stock Exchange to the Nasdaq Stock Market. Palantir concluded with this: “Upon transferring, Palantir anticipates meeting the eligibility requirements of the Nasdaq-100 Index.”
Can’t make it any plainer than that.
And Palantir got its wish. They are being added to the Nasdaq-100 at the close of trading on Friday.
Coinbase denied
Two companies are being added to the S&P 500: Apollo Global Management, and Workday. Qorvo and Amentum are being removed.
Most people think the S&P 500 is the 500 largest companies in the United States, but it’s more complicated than that. There are a number of requirements that have to be met to get into the S&P 500, including a minimum market capitalization of $18 billion.
However, there is no obligation to mechanically include only the 500 largest companies by market capitalization: ”Constituent selection is at the discretion of the Index Committee and is based on the eligibility criteria,” S&P Global’s methodology paper says.
For S&P, adding Apollo (financials) and Workday (technology) are relatively safe choices. At $96 billion and $70 billion in market cap, both are squarely in the large-cap segment of the market.
Still, many investors were hoping that Coinbase Global, which has a similar market cap to Workday ($68 billion) would be added to the S&P 500. It certainly qualifies based on market capitalization and profitability (it’s been profitable the last four quarters). But Coinbase is a far more volatile stock that either Apollo or Workday.
Coinbase did not make the cut. It’s not clear why, but perhaps because the S&P Index Committee was concerned about the volatility. Coinbase is one of the most volatile of all stocks. This year alone, it has moved from a low of $117 to about $350, a 200% move.
Perhaps it’s a coincidence, but Coinbase was down 9% the day after the S&P inclusion announcement was made, and the cryptocurrency platform was excluded.
MicroStrategy sector
Sometimes just determining where a stock should be classified can be a big issue, especially when big money is involved.
Going into the Nasdaq-100 are MicroStrategy, Palantir and Axon Enterprise. Going out are Illumina, Super Micro Computer and Moderna.
To enter the Nasdaq-100, a company has to be listed on the Nasdaq Global Select Market or the Nasdaq Global Market, have a free float of at least 10%, and while there is no minimum or maximum market capitalization requirement, the annual reconstitution (determining who goes in and out), is loosely based on market capitalization: ”The Nasdaq-100 Index is designed to measure the performance of 100 of the largest Nasdaq-listed non-financial companies,” Nasdaq says in its Index Methodology paper.
Note the requirement that any entrant be a “non-financial stock.”
Based on market capitalization, MicroStrategy has certainly earned its spot in the Nasdaq-100. It has been a monster this year, up over 400%, and now sports a market cap of about $80 billion. That alone would put MicroStrategy in the top half of the Nasdaq-100 by market value.
Like Coinbase, it is a very volatile stock (trading range in 2024: $50 to $500).
More interesting is the fact that MicroStrategy is listed as a technology stock, but given that about half its value is in bitcoin (it owns 439,000 bitcoin with a current value about $42 billion), is it accurate to call it a tech stock?
Chairman Michael Saylor has said he wants to run MicroStrategy as a “bitcoin bank.”
Should we take him at his word? Should MicroStrategy be classified as a financial stock, which would make it ineligible to be in the Nasdaq-100?
For the moment, it’s classified as a technology stock. Whether it stays there is uncertain. There’s this thing called the Industry Classification Benchmark (ICB), which is the system developed to categorize public companies into specific industries and sectors. There are periodic reviews to make sure companies are in their appropriate sectors.
But that is for another day. For the moment, Bitcoin fans are loving it. Their darling is in the Nasdaq-100.
Whether index fans will love it is yet to be determined.