Indexy a trhy
How Equity Indices Are Created and Updated
Key takeaways
- Equity indices are governed by methodologies — rules for inclusion, exclusion, and weighting — maintained by index committees.
- The S&P 500 has explicit criteria: market cap above $14.5 billion, four consecutive profitable quarters, 50% of shares in free float.
- Addition to an index (especially the S&P 500) has historically caused a short-term rise in the added stock's price — passive funds must buy it immediately.
- Index rebalances occur regularly (quarterly or semi-annually) — at each rebalance all ETFs tracking the index adjust their holdings.
An equity index is not just a list of companies — it is a precisely defined methodology with specific rules for inclusion, exclusion, weighting, and rebalancing, decided by an index committee.
Who decides on index composition?
Every index has its own administrator. The S&P 500 is administered by S&P Global; MSCI administers its own family of indices (MSCI World, Emerging Markets, etc.); FTSE Russell administers the Russell 2000 and FTSE All World. Each administrator has a methodology document — a publicly available document that precisely describes the criteria for inclusion and exclusion.
S&P 500 criteria (simplified):
- Market capitalisation above approximately $14.5 billion (updated periodically)
- The company must be incorporated in the US
- Four consecutive quarters with positive cumulative earnings
- At least 50% of shares must be freely tradeable (free float)
- Sufficient liquidity — annual trading volume as a percentage of market capitalisation
Why does addition to an index change the price?
When the S&P 500 announces the addition of a new company, hundreds of passive ETFs and funds must buy that stock immediately — otherwise their portfolio would not track the index. This concentrated demand has historically caused a short-term rise in the added stock's price of several percent on the announcement day. The effect is called the index effect and is why a major addition to an index (Tesla in 2020, Nvidia at various index version updates) can move the market.
How does rebalancing work?
MSCI rebalances its indices four times a year (in February, May, August, and November). The S&P 500 rebalances quarterly and also on an extraordinary basis for mergers and bankruptcies. At each rebalance all ETFs tracking the index must adjust their portfolio composition — this causes elevated trading volumes on rebalance days. Read more about how ETFs work in the article what is an ETF or in the ETF section.
FAQ
Can a company apply to be included in the S&P 500?
No — a company cannot actively apply. The S&P Global index committee monitors the market and companies that meet all criteria (market cap, profitability, free float, liquidity) become candidates. The final decision rests with the committee, which also weighs qualitative factors.
What happens when a company drops out of the index?
Passive ETFs tracking the index must sell the stock immediately after the rebalance. This can cause a short-term decline in the removed company's share price. For the company itself it is largely a symbolic event — it does not affect its business operations, but it may make it harder to raise capital and reduce institutional interest.
Are indices neutral?
Indices are defined by methodologies and the decisions of specific committees — they are not purely mechanical. For example Tesla waited longer for S&P 500 inclusion than its market cap would suggest. The four-quarters-of-profitability criterion held it back. Methodologies therefore have implicit values — profitability is prized in the S&P 500.