Reddit Joins the S&P 500 Tuesday. Here's What History Says Could Come Next -- and What Investors Should Know.

Reddit (NYSE: RDDT) is going into the S&P 500 (SNPINDEX: ^GSPC). S&P Dow Jones Indices said Thursday evening that the societal media institution volition regenerate AvalonBay Communities successful the scale earlier the marketplace opens connected Tuesday, Aug. 18. AvalonBay is leaving due to the fact that a chap scale member, Equity Residential, is acquiring it.

Investors treated the announcement arsenic a windfall. Reddit shares were up astir 13% successful Friday trading, adjacent $179.

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Even aft the jump, the banal sits astir 37% beneath its 52-week precocious of $282.95.

The logic down the popular is elemental enough. Index funds tracking the S&P 500 indispensable bargain Reddit shares by Tuesday, and forced buying should propulsion the terms up. But is joining the scale worthy 13% of a company's value? The champion probe connected the taxable says the scale bump has been shrinking for decades, and that implicit the astir caller one, it fundamentally vanished.

The disappearing scale effect

In a survey titled precisely that, Robin Greenwood and Marco Sammon of Harvard Business School measured the abnormal instrumentality (the determination beyond what the marketplace would person delivered anyway) for each S&P 500 summation betwixt 1980 and 2020.

The effect wasn't ever small. Additions gained an mean of 3.4% successful the 1980s, and the fig swelled to 7.4% successful the 1990s. From there, though, it faded -- to 5.2% successful the 2000s, and to little than 1% implicit the 2010s, a effect the authors telephone statistically indistinguishable from zero. The signifier holds successful reverse, too. Getting dropped from the scale outgo the mean deletion 16.1% successful the 1990s and conscionable 0.6% successful the 2010s.

Companies jumping consecutive into the scale from extracurricular S&P's smaller benchmarks did better, and that's Reddit's situation. But the aforesaid decay shows up: nonstop additions returned 10.2% successful the precocious 1990s, 8.8% successful the 2000s, and 5.4% successful the 2010s -- and adjacent that fig needs an asterisk, due to the fact that the tremendous 2020 inclusion rally successful Tesla props it up. Excluding Tesla, the additions of 2020 averaged astir nothing.

The marketplace adapted

Why did the effect fade? The authors' reply is mostly structural. More additions present migrate up from the S&P MidCap index, wherever index-tracking wealth already owns them, truthful the caller buying is smaller than it looks. And the marketplace has go acold amended astatine supplying shares erstwhile scale funds bash person to buy. Plenty of investors present basal acceptable to instrumentality the different broadside of the trade.