Reddit (NYSE: RDDT) is going into the S&P 500 (SNPINDEX: ^GSPC). S&P Dow Jones Indices said Thursday evening that the social media company will replace AvalonBay Communities in the index before the market opens on Tuesday, Aug. 18. AvalonBay is leaving because a fellow index member, Equity Residential, is acquiring it.
Investors treated the announcement as a windfall. Reddit shares were up about 13% in Friday trading, near $179. This Rare Signal Is Flashing Again.
In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue » Even after the jump, the stock sits roughly 37% below its 52-week high of $282.95.
The logic behind the pop is simple enough. Index funds tracking the S&P 500 must buy Reddit shares by Tuesday, and forced buying should push the price up. But is joining the index worth 13% of a company's value?
The best research on the subject says the index bump has been shrinking for decades, and that over the most recent one, it essentially vanished. In a study titled exactly that, Robin Greenwood and Marco Sammon of Harvard Business School measured the abnormal return (the move beyond what the market would have delivered anyway) for every S&P 500 addition between 1980 and 2020. The effect wasn't always small.
Additions gained an average of 3.4% in the 1980s, and the figure swelled to 7.4% in the 1990s. From there, though, it faded -- to 5.2% in the 2000s, and to less than 1% over the 2010s, a result the authors call statistically indistinguishable from zero. The pattern holds in reverse, too.
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