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In advance of the SpaceX initial public offering (IPO), well-known index providers, including FTSE Russell, Nasdaq and S&P, are altering their inclusion to fast-track entry of Elon Musk’s rockets and satellite company. Those alterations will likely apply to Anthropic and OpenAI as well.
Focusing on the S&P 500 for the moment, entry into that index is, as the kids say, kind of a big deal and it’s about much more than prestige, though that undoubtedly helps.
“Getting listed on the S&P 500 can help shares of a company, at least momentarily, often by simple mathematics,” according to Charles Schwab. “If a stock joins the index, most mutual funds and exchange-traded funds (ETFs) that seek to emulate the index buy shares of the new addition and remove shares of whichever companies were delisted. That means a quick burst of money that can raise the share price of the new kid on the block, like Pac Man eating an energy dot.”
That is to say it sure is nice to hold stocks in advance of their inclusion in major indexes, but that’s easier said than done because index providers don’t come right and say what stocks are on deck. A new exchange traded fund (ETF) eases this burden.
Angles on ADDS
Aptly tickered, the Hedgeye Index Adds ETF (NYSE: ADDS) debuted last week, presenting advisors and investors with an actively managed basket of stocks primed for inclusion in one or two of four widely observed domestic equity gauges.
“ADDS uses proprietary machine learning models to generate probabilistic forecasts of companies likely to be added to the indices it tracks. The portfolio typically holds approximately 40 U.S. equities that either currently meet, or are expected to soon meet, the eligibility requirements of major indices including the S&P 500, S&P 400, S&P 600, and Nasdaq 100,” according to the issuer.
Hedgeye points out that ADDS will never hold current S&P 500 member firms and when one (or more) of its holdings join that index, those positions are sold “at the market-on-close on the day it is added to its target index.”
To make things simple, say ADDS was around last year in advance of Robinhood Markets (NASDAQ: HOOD) being added to the S&P 500. If the ETF held that stock in prior to its S&P 500 inclusion, the fund would’ve departed that position on the day the stock joined the index.
Assessing ADDS Bets
ADDS has a different way of doing things and for the purposes of accessing stocks positioned to gain prestigious index promotions, the new ETF’s methodology could benefit end users.
“With a 20% per-name cap, monthly rebalance cycle, and disciplined liquidity profile, ADDS offers investors a systematic, differentiated source of return rooted in flow timing rather than traditional security selection,” notes the issuer.
So it’s possible that there will be times when one stock commands approximately 20% of the ETF’s roster. That’s not the case today, but three names – Marvell Technology (MRVL), Flex (FLEX) and Bloom Energy (BE), combine for about 36% of the ETF’s roster. If one or more of that trio make the jump to the S&P 500, ADDS stands to benefit.
The new ETF charges 0.70% per year, or $70 on a $10,000 investment.
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