Do S&P 500 funds run by different investment companies have different performance based on the buying / selling speed of the company?

Question

Three major investment companies that I can think of are Vanguard, Schwab, and Fidelity. Each of those have their own version of funds that track the S&P 500

• https://investor.vanguard.com/investment-products/etfs/profile/voo
• https://www.schwab.com/research/mutual-funds/quotes/chart/swppx
• https://fundresearch.fidelity.com/mutual-funds/summary/315911750

As per Wikipedia the criteria for which companies are in the index are not strictly rule based. So presumably there is some time between when publishing and when the S&P committee decides which company should be added or removed from the fund. Seeing as "gobs" of money is invested in S&P 500 tracking funds (I didn't find the amount), when all of that money goes into a new company that is added to the index, that presumably should increase the value of the stock (purely by virtue of a lot of people trying to buy its stock). Similarly, companies that are removed should decrease in value.

Hypothetically, assuming I ignore insider trading rules (which I'm not sure even apply), if I get a hold of the new version of the index before it is published and buy stocks in all of the new companies, I can sell those stock immediately after the index is published for instant profit.

That probably isn't too realistic, since I assume that the S&P council try hard to avoid leaks. But, let's say that I'm vanguard and I have a super fast computer with super fast internet connection. I could be the first company to buy the new stocks after the S&P 500 is released, and then when schwab and fidelity try to buy their shares, they will have to buy them at a premium, and I can profit by seeing my stocks rise in value.

Am I understanding this correctly? If so, do these companies invest in a process to instantly buy/sell stocks right after the new version of the S&P 500 is published?

Answer 1

That probably isn't too realistic, since I assume that the S&P council try hard to avoid leaks. But, let's say that I'm vanguard and I have a super fast computer with super fast internet connection. I could be the first company to buy the new stocks after the S&P 500 is released, and then when schwab and fidelity try to buy their shares, they will have to buy them at a premium, and I can profit by seeing my stocks rise in value.

Yes they try to avoid leaks. But sometimes everybody knows who is leaving. So they start to anticipate when changes will be made.

I looked at the (most?) recent S&P 500 change announcement KKR, CrowdStrike Holdings and GoDaddy Set to Join S&P 500; Others to Join S&P MidCap 400 and S&P SmallCap 600

NEW YORK, June 7, 2024 /PRNewswire/ -- S&P Dow Jones Indices ("S&P DJI") will make the following changes to the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indices effective prior to the open of trading on Monday, June 24, to coincide with the quarterly rebalance.

If a company wants to make the adjustments they have 10 tradings days to do so. They don't have to rush.

while the title seems straight forward, in actuality it is more complex.

• KKR & Co Inc. (NYSE:KKR), CrowdStrike Holdings Inc. (NASD: CRWD), and S&P MidCap 400 constituent GoDaddy Inc. (NYSE: GDDY) will replace Robert Half Inc. (NYSE:RHI), Comerica Inc. (NYSE:CMA) and Illumina Inc. (NASD:ILMN) in the S&P 500 respectively, and Illumina will replace GoDaddy in the S&P MidCap 400. Robert Half and Comerica will replace Anywhere Real Estate Inc. (NYSE:HOUS) and ADTRAN Holdings Inc. (NASD:ADTN) in the S&P SmallCap 600. Illumina announced its intention to spin-off a company later this month.

• Texas Pacific Land Corp.(NYSE:TPL), BioMarin Pharmaceutical Inc.(NASD:BMRN), Warner Music Group Corp. (NASD:WMG), Nextracker Inc. (NASD:NXT), Altair Engineering Inc. (NASD:ALTR), and RB Global Inc. (NYSE:RBA) will replace Werner Enterprises Inc. (NASD:WERN), Integra Lifesciences Holdings Corp. (NASD:IART), PENN Entertainment Inc. (NASD:PENN), Grocery Outlet Holding Corp. (NASD:GO), Leggett & Platt Inc. (NYSE:LEG) and Hertz Global Holdings Inc. (NASD:HTZ) in the S&P MidCap 400 respectively. Leggett & Platt, Hertz Global Holdings, Grocery Outlet Holding, PENN Entertainment, Integra Lifesciences and Werner Enterprises will replace Methode Electronics Inc. (NYSE:MEI), Chatham Lodging Trust (NYSE:CLDT), Northfield Bancorp Inc. (NASD: NFBK), Xperi Inc. (NYSE:XPER), Resources Connection Inc. (NASD:RGP) and ATN International Inc. (NASD:ATNI) in the S&P SmallCap 600 respectively.

• Krystal Biotech Inc. (NASD:KRYS), Virtu Financial Inc. (NASD:VIRT), StepStone Group Inc. (NASD:STEP), Cactus Inc. (NYSE:WHD), and Tidewater Inc. (NYSE:TDW) will replace OraSure Technologies Inc. (NASD:OSUR), The Marcus Corp. (NYSE:MCS),TTEC Holdings Inc. (NASD:TTEC), Medifast Inc. (NYSE:MED), and Cerence Inc. (NASD:CRNC) in the S&P SmallCap 600 respectively.

Notice that those changes were moving companies between indexes. Many of these companies were already owned by the big index funds and ETFs. During those 10 days they might have to make adjustments by moving shares between the holdings of the different index funds but they certainly weren't selling millions of shares on the market to do so. They may have to adjust the number of shares due to the size of their holdings, but they have time to make those adjustments.

I am sure that there is some movement in share price with big announcements. So If you can anticipate the ones that will get a bump then try it. Some active funds may want to do that. But the index funds won't. They don't see the benefit being worth the risk.

Answer 2

The S&P 500 is a proprietary index. I am a former employee of S&P Global Ratings. (I was not a member of any S&P Index committee. I did securities ratings.) The link to the Wikipedia Standard & Poor's 500 Index article, included by OP, correctly states that:

...the components of the S&P 500 index are selected by a committee. When considering the eligibility of a new addition, the committee assesses the company's merit using the following primary criteria...

The criteria given in the Wikipedia article are sourced from S&P Global Ratings publically-available documentation. These are guidance criteria but the S&P 500 is not a rule-based index. The S&P 500 index committee meets and their final decision to change the index composition is kept secret even within Standard & Poor's. Only the 15 or so committee members and a very few need-to-know staff will have access to details of when and what changes the committee will make.

As stated in another answer, S&P Global Ratings issues a press release, e.g. through a wire service like PR Newswire, announcing a change in the S&P 500 index composition about 10 business days in advance. That is important, in order that index funds have time to make adjustments in order to continue to match the market performance of the altered S&P 500 index.

It wouldn't make any difference if you

were Vanguard and had a super fast computer and super fast Internet connection.

You're not going to be able to front-run the index composition change AFTER S&P makes the announcement.

Let's say you did somehow get access to the S&P 500 Index committee's decision BEFORE the official newswire announcement.

Let's say that this particular change is a major one, specifically, adding or removing a stock from the S&P 500 index, and not merely a quarterly rebalancing based on incremental changes in relative market capitalization for the 500 component stocks.

Often, such a change is anticipated by institutional money managers. That's because the index composition criteria is made available to the public (that is, all potential market participants) by S&P Global Ratings, as mentioned above. For example, it was widely and openly discussed (in the Wall Street Journal, on Twitter, etc.) and thus anticipated when Tesla stock was initially added to the S&P 500. It was due to the market cap attained by the company at that time, and the historical presence of auto manufacturers in the composition of the index.

Let's say that this particular change is not what the market was expecting. In such a scenario, if you had obtained the committee's decision in advance, that would constitute having access to material, non-public information about U.S. equity markets. If you were the Vanguard S&P 500 Index portfolio manager, both you and Vanguard's compliance department would be fully aware that acting on material, non-public information so as to profit from anticipated changes in stock price of a NYSE or NASDAQ-listed company would result in unacceptable legal and reputational risk exposures, i.e. violation of the Securities Laws of 1933 and 1940 and maybe others.

Such activity would have a high likelihood of being detected internally at Vanguard as well as by regulators--the U.S. Securities & Exchange Commission--and by compliance officials who work for NYSE and NASDAQ. Vanguard would be charged with breaking the law and maybe S&P Global Ratings would be too, as they are expected to behave responsibly and not allow something like this to happen.

That's why this scenario is NOT going to be successful if you are an index fund:

if I get a hold of the new version of the index before it is published and buy stocks in all of the new companies, I can sell those stock immediately after the index is published for instant profit.

Answer 3

Index Funds are not required to buy companies the instant that are added to the index. Their only requirement is to track the value of the index. Yes there may be some additional demand from a stock being added to the index, but usually it is added as one of the smaller companies in the index, so it makes up a relatively small portion of the index (much less than 1/500), so even waiting a few days to buy and looking for favorable prices will not hurt an index tracker significantly. They can also use derivatives to supplement their actual stock holding to help with any tracking error.

So don't expect that you can "front run" the index funds and pick up some instant gain - everyone else knows that they will be aded to the index also, so there's no magic moment that you need to be in front of.