Reddit Joins S&P 500: Index Effect Fades for Investors

Reddit (RDDT) is set to join the S&P 500 effective Tuesday, August 18, replacing AvalonBay Communities. The announcement has already boosted Reddit's shares, with the stock up approximately 13% in recent trading, approaching $179, though still around 37% below its 52-week high. The inclusion necessitates buying by S&P 500 tracking funds, a move traditionally expected to elevate stock prices.

However, research indicates a significant decline in the market's reaction to such additions. Studies measuring abnormal returns for S&P 500 additions from 1980 to 2020 show a substantial reduction in the average gain. Additions saw average gains of 3.4% in the 1980s, which rose to 7.4% in the 1990s, but then fell to 5.2% in the 2000s and less than 1% in the 2010s. Companies entering the index directly from outside smaller benchmarks, like Reddit, have also experienced this decay, returning 5.4% in the 2010s when excluding notable outliers. This trend is attributed to market structural changes, increased anticipation, and greater efficiency in share supply, suggesting the 'index bump' may offer limited sustained advantage.