Joining the S&P 500 may not be as big a boon as often assumed

LAST MONTH Tesla reported second-quarter net income of $104m. This came as a surprise; the pandemic has pushed many carmakers into the red as cash-strapped consumers put off purchases. It also had Tesla’s investors aflutter, for it marked the firm’s fourth consecutive quarter of profits. At last, thanks to that milestone, the maker of snazzy electric vehicles—which in July overtook Toyota was the world’s most valuable car firm—met the formal criteria for inclusion in the S&P 500.

As covid-19 has boosted pandemic-resilient businesses such as technology firms while walloping industries such as travel, more companies than usual may drop out of or enter that coveted club this year. Membership of Wall Street’s flagship share index is seen as a boon, because “passive” investors, who do not actively pick winning stocks but merely track the broader stockmarket, must buy the shares of any new member (and sell those of the firm it displaces). This should drive up the entrant’s share price. Thereafter, one theory goes, increased common ownership of companies by large index funds, which hold stakes in listed rivals, reduces competitive pressure and leads to juicier shareholder returns all around.

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via Business Feeds

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