S&P Effect

S&P Effect

The increase or decrease in the price of a stock when it is added to or deleted from the S&P 500. When a stock is added to or deleted from the index, all index funds tracking the S&P 500 must buy or sell that stock in order to continue being index funds. This increases pressure to buy or sell that stock, resulting in an increase or decrease in price.

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S&P Effect

The change in the price of a stock because the stock is added to or dropped from the Standard & Poor's 500 Stock Index. Index funds based on the popular S&P 500 must purchase shares of any stock that is added to the index, thus creating added demand that is likely to drive up the price of the stock. Conversely, stocks dropped from the S&P 500 must be sold by these same index funds.

Case Study High flyer Yahoo! received an added boost in late 1999 when the stock was added to the Standard & Poor's 500 Stock Index. On December 7, the day before Yahoo! was to be included in the popular index, the Dow Jones Industrial Average and the S&P 500 each declined by about 1%. On the same day, Yahoo! increased in price by $65 to $348 per share on a trading volume of 62 million shares. Nearly a third of the volume occurred near the end of the trading day as portfolio managers of mutual funds that track the index adjusted their portfolios to include the stock. Because Yahoo! enjoyed such a high market capitalization, the portfolio managers were required to reduce their holdings of the other 499 stocks in the index as well as dispose of all of Laidlaw, the stock Yahoo! replaced. According to a report by a major research firm, portfolio managers bought $5 billion of Yahoo! stock and sold an equal amount of other stocks in the index.