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Point of View · 12.18.23
S&P 500 Index Rebalance: Uber Addition Boosts Weight of Transportation
The addition of rideshare company Uber to the S&P 500 index notably impacted the sector and industry composition.
- Index Equity
- Equity Insights
S&P 500 Index Rebalance: Uber Addition Boosts Weight of Transportation
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Key Points
What this is
We analyze the additions, deletions and weighting changes of S&P 500 companies for S&P’s December rebalance.
Why it matters
Quarterly changes in indexes over time can impact the composition and performance.
Where it's going
The addition of Uber, already with above-average market capitalization, demonstrates the importance of understanding index eligibility rules.
Key Changes in the Index
In the December S&P 500 Index rebalance effective December 18, S&P Dow Jones Indexes added rideshare company Uber Technologies, with a weighting of 0.3% in the index. While the delay in adding Uber to the index may surprise some investors, S&P requires member companies to demonstrate positive earnings in the latest quarter and over the preceding four quarters. This was the same rule that kept Tesla out of the large cap index until December 2020, when the electric vehicle company was finally added as the sixth-largest company to the index. Additionally, constituents must maintain an adjusted market cap of at least $14.5 billion. Uber has a market cap of $118 billion, multiples of the $31 median market cap for companies in the S&P 500.
Other additions include building products company Builders Firstsource with a 0.04% weighting and manufacturer Jabil with a 0.03% weighting. S&P removed airline Alaska Air, packaging company Sealed Air and solar power firm SolarEdge Technologies from the index. More details on key weight changes are in Exhibit 1.
EXHIBIT 1: KEY CHANGES IN THE S&P 500
Uber joined the index with a weighting change of 0.3%. Three companies were added while three were removed.
Source: S&P Dow Jones, as of December 1, 2023. Share decreases occur when companies repurchase shares. Relative trading volume is the daily trading average since December 1 versus the average 60-day daily trading before December 1.
Aligning the Index Portfolio to the Changes
As an index portfolio manager, we look at increased weightings for companies as “buys” and decreased weightings as “sells,” as that is how we need to trade the portfolio to align with the rebalancing. The weightings of the buys and sells must be equal to maintain consistency in the index, and in this case each side of the S&P 500 rebalance represented 0.42% in the index. The buys include 0.38% for the three new companies and sells included the 0.03% reduction for the elimination of the three companies and 0.39% for share decreases. All weights mentioned above are based on December 1 close prices, when S&P announced the changes.
Sector and Industry Impact
The rebalances also changed the sector and industry composition of the index, as shown in Exhibit 2. At a sector level, industrials increased the most through the addition of Uber. Communication services and financials declined the most partly because of share decreases in Google browser company Alphabet, credit card firm Visa and financial firm JPMorgan. Industry movements largely followed sectors. The transportation sector gained the most through Uber while media and entertainment sector fell the most due to Alphabet. Energy declined the most partly because Exxon Mobil and Chevron. Industry group movements largely followed sectors. The transportation sector gained the most through Uber while the energy sector fell the most.
EXHIBIT 2: Uber drives sector and industry weighting changes
The addition of Uber boosted the weightings of the industrials sector and transportation industry.
Performance of S&P 500 Rebalance
Although the pressure from index managers can impact performance, we note that the S&P rebalance is well advertised. This actually provides a shock absorber as other market participants can provide liquidity and dampen the potential market impact. Further, there are other catalysts driving stock prices beyond the rebalance including macro events and those specific to companies. In the case of this rebalance, adds outperformed deletes with deletes closing the spread on the last trading day. Increases and decreases largely performed in-line with each other. These results are shown in Exhibit 3. The sheer number of names in each category also resulted in lower spread with increases edging out decreases in the last days of trading.
December 15 saw expected, but extreme trading volumes due to the simultaneous expiration of stock options, stock index futures, and stock index options contracts, an event know as a triple witching date. Uber experienced trading volumes 16 times above average as seen in Exhibit 1. Overall, the heightened trading did not create much impact.
EXHIBIT 3: Performance Went the 'Right Way'
Normally, we expect the added companies to outperform the deleted companies, which occurred since the S&P release on the changes on December 1.
What the Rebalance Means to Investors and Index Managers
The S&P 500’s December rebalance has shown that eligibility requirements can prove impactful because growth companies can reach significant market capitalizations prior to turning a consistent profit, as was the case with Uber and Tesla three years prior. While the overall index turnover was relatively small at 0.92%, given the amount of assets that track the S&P 500, trading volume increased significantly for the added and deleted companies, along with stocks with share and/or float changes.
Attentive analysis is crucial to understand how an impending index rebalance will shape the index, and by extension, the portfolios that track it. We believe this analysis requires a thoughtful approach with the aim of keeping to a minimum while ensuring that the market impact and related to rebalancing do not erode wealth over time.
Tracking Error
Tracking error is the difference in performance between a portfolio and its benchmark, often used to determine the degree of active management of an investment strategy.
Main Point
Why Index Rebalances Matter
This rebalance has shown that eligibility requirements can prove impactful because growth companies can reach significant market capitalizations prior to turning a consistent profit, as was the case with Uber this month and Tesla three years ago. Attentive analysis is crucial to understand how an impending index rebalance will shape the index, and by extension, the portfolios that track it.
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