HomeBusinessThe next shakeup in the S&P 500 could herald Coinbase, Block, or...

The next shakeup in the S&P 500 could herald Coinbase, Block, or these other stocks

Coinbase, Block and Robinhood meet the criteria for inclusion in the benchmark index. – MarketWatch photo illustration/iStockphoto

The S&P 500 could soon get a somewhat fresh look as the index’s quarterly rebalancing looms.

Based on historical patterns, S&P Dow Jones Indices could announce new participants in the major US benchmark index after Friday’s close. The index provider would then also announce the components that will leave the S&P 500 SPX.

Stocks tend to rise when they are announced as future components of the S&P 500, mainly because trillions of dollars have been invested in index funds that track the benchmark.

“It means those index funds have no choice but to buy the stocks that join the index. so it’s a clear source of demand over a period of time, from when the announcement happens, to when it occurs,” which is usually a short time frame, said Steve Sosnick, chief strategist at Interactive Brokers.

Normally, the announced newcomers do not come as a surprise, because they are buzzy names that just meet the profitability criteria or are among the largest components in terms of market capitalization of the S&P MidCap 400 Index MID or the S&P Small Cap 600 Index SML. These indexes, together with the S&P 500, form the S&P Composite 1500 Index XX:SP1500.

“Markets are somewhat efficient,” Sosnick said. “They tend to anticipate.”

There are several criteria that companies must meet to be included in the S&P Composite 1500 for the first time. These include being based in the US and showing positive combined earnings per share over the past four reported quarters, while also be profitable for the most recent reported quarter. To be included in the S&P 500, companies need a market capitalization of $18 billion or more, but for the other indexes the market capitalization thresholds are lower.

Several names have been put forward as candidates for inclusion in the S&P 500 this time around, including financial technology play Coinbase Global Inc. COIN and Block Inc. SQ, software company Workday Inc. WDAY and used car retailer Carvana Co. CVNA

The decisions are made by an index committee and, according to Sosnick, are “more art than science.” The S&P 500 is not simply a list of the 500 largest companies, ranked by market capitalization. Instead, the committee may try to avoid particularly volatile components or focus on certain features at different times.

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