Index addition forces trillions in passive buying
Reddit will be added to the S&P 500 index next week, the Associated Press reported Friday, giving the social media company an immediate boost in prestige and triggering a wave of forced buying from index-tracking funds. Reddit’s stock surged nearly 14% in midday trading following the announcement.
Joining the S&P 500 is considered an achievement for a company because the index is a widely followed measure of the broader U.S. stock market’s health, the AP reported. Companies are selected for inclusion based on several criteria demonstrating stability, including market size and consistent profitability, the AP said.
Inclusion carries mechanical consequences beyond status. The index tracks 500 of the biggest U.S. stocks, and trillions of dollars in investments benchmark their performance against it, the AP reported. Those investments include mutual funds and exchange-traded funds.
Funds that track or mirror the index must buy the stock once it becomes part of the benchmark, the AP wrote. The forced purchases represent a guaranteed wave of demand from passive investments at the moment of inclusion.