David Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices, comments on Facebook’s inclusion in the S&P 500…
On 11 December, after the market closed, S&P Dow Jones Indices announced that Facebook will join the S&P 500 as of the market open on Monday, 23 December. This was probably one of most predicted, asked about and commented on additions to the S&P 500 in the last few years. Measured by the number of suggestions to (or demands of) the index committee, Facebook ranks with other tech darlings including Google, Yahoo and AOL.
Facebook closed at USD49.38 on 11 December before the index announcement and opened at USD51.04 on 12 December, an overnight gain of 3.4%. The move is similar to other recent index additions, but is a good deal lower than some of the overnight jumps seen in the past. Most likely market participants were expecting an announcement on Facebook – one analyst predicted it shortly before the announcement of General Growth Properties as the replacement for Molex a couple of weeks ago.
Wall Street analysts and bankers ask about index additions because they are guessing who will be next. Their questions are: Why this one? Why now? Did you worry about being under-weighted in that sector? Some answers –
Why Facebook? The S&P 500 is often termed “leading companies in leading industries.” Facebook is certainly a leading company in internet software and services which is definitely a leading industry. No one suggested that it should not have gone in. Why Now? Two factors: our guidelines require four quarters of positive earnings according to GAAP and Facebook only reached this last fall. Second, this is a large company and we wanted a date with a lot of trading and liquidity. The third Friday of the last month of the quarter, when futures and options expire, is such a day. Were we worried about sector weighting? It was not the primary factor in this decision. Who’s next? Stay tuned.