By: Wayne Duggan
Traders are anticipating some major market volatility this week as the S&P Dow Jones Indices completes the quarterly rebalancing of its popular stock indices, including the S&P 500.
What Is Rebalancing?
S&P adjusts the constituents in its popular S&P 500 and S&P MidCap 400 indices on a quarterly basis. These S&P 500 index tracks the performance of 500 of the largest companies traded on U.S. stock exchanges. To be eligible for inclusion, a company must be headquartered in the U.S., have a market capitalization of at least $11.8 billion, be highly liquid, and have a public float of at least 10% of its outstanding shares. In addition, the company’s most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must both be positive.
New stocks that meet the market cap and profitability requirements are added to the index, and companies that drop below the thresholds for inclusion are removed from the index every three months. This December, the S&P 500 and S&P 400 will be rebalancing after the market closes on Dec. 17.
Stocks To Watch
This quarter, the S&P 500 is adding three new members from the S&P MidCap 400:
Those three stocks will replace these three, which will transition from the S&P 500 to the S&P 400:
In addition to the three stocks dropping down from the S&P 500 index, the S&P MidCap 400 index will be adding the following three stocks from the S&P SmallCap 600 index:
The following three stocks will be dropping down from the S&P 400 to the S&P SmallCap 600 index:
What To Expect
Traders should be on the lookout for extreme volatility in some of the stocks involved in the rebalancing, but predicting which direction that volatility will swing is not as straightforward as it may seem.
The S&P 500 is one of the most popular investing benchmarks in the world, and some of the largest exchange-traded funds seek to emulate the index with their own holdings. Therefore, massive indexers like Fidelity and Vanguard are forced to buy large quantities of any stock that joins the S&P 500 to keep the weighting of their S&P 500 funds up-to-date.
However, traders know the changes to the S&P 500 indices well in advance, and the predictable nature of S&P 500 selection means inclusion in the index may start to be priced into the joining stocks weeks or even months in advance.
Trading the S&P 500 rebalancing can be tricky, and it’s not necessarily as simple as buying the stocks joining the index and selling the ones leaving. But traders should make sure to mark Dec. 17 on their calendars and be prepared for some extreme volatility in all of the rebalancing stocks mentioned.
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