Do Not Call
The S&P 500 Index is a benchmark representing 500 of the largest publicly traded companies in the U.S. It is one of the most followed indices globally. Inclusion in this index signals a company’s size, stability, and investor confidence. But what happens when a company gets removed?
Whether due to a merger, bankruptcy, or falling market cap, removal from the S&P 500 can lead to both operational and stock-related consequences for the affected company. Let’s break down the causes, effects, and what investors should know.
Companies that drop significantly in value may no longer meet the size requirements for the index.
If an S&P 500 company is acquired, it is delisted and removed from the index.
Companies that file for bankruptcy or exhibit serious financial instability are typically removed.
If a company no longer represents its sector or changes its listing status, S&P may exclude it.
Being removed from the index often signals a decline in investor confidence and can hurt the company’s image.
S&P 500-linked ETFs and mutual funds must sell the stock once it is excluded, leading to selling pressure.
There is often a short-term dip in share price due to heavy selling by passive funds and traders.
When S&P announces a company’s removal, it simultaneously announces its replacement. This causes movement in both stocks.
Fund managers who track the index adjust their holdings accordingly, often creating increased trading volumes.
Traders exploit price differences between exiting and entering stocks, increasing volatility.
Those investing through S&P 500 ETFs or index funds may see the stock automatically removed from their portfolio during rebalancing. This means they exit the position without making an active choice—potentially missing out on future gains if the company rebounds post-removal.
Active fund managers and individual investors will typically evaluate the company’s fundamentals, not just its index status. If the underlying business remains strong, they may choose to retain or even increase their holdings despite its exclusion from the index.
Index adjustments often cause temporary volatility. Traders may look to profit from sharp price movements around the time of removal—either by shorting the stock in anticipation of ETF selling pressure or entering post-drop for a rebound play.
In 2022, Twitter was removed from the S&P 500 index following its acquisition by Elon Musk and transition into a private company. As a result, passive funds and ETFs tracking the index were required to exit the stock, leading to institutional sell-offs. While the company’s fundamentals were no longer in public focus, the delisting impacted liquidity and visibility among investors.
General Electric, once a founding member of the Dow Jones Industrial Average and a long-standing S&P 500 constituent, was removed from major indices after a prolonged period of declining market capitalization and structural challenges. Though still operational, the removal significantly influenced investor sentiment and highlighted the importance of meeting evolving index eligibility criteria.
Removal from the S&P 500 is more than a technical adjustment — it often reflects deeper business challenges. While it can lead to short-term price pressure and loss of prestige, companies can still thrive outside the index. For investors, understanding the reasons and effects of such removals can aid smarter decision-making.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Even well-performing firms may be removed due to mergers, structural changes, or if they no longer meet market cap and liquidity requirements.
Usually, yes. Index funds sell the stock to rebalance, often triggering a short-term price drop—even if the company’s fundamentals are intact.
Yes. If it meets the inclusion criteria again and ranks above other candidates, it can be re-added during future reviews.
Official reviews happen quarterly, but changes can be made at any time in response to corporate events or eligibility updates.
Most do during scheduled rebalancing, aligning with the updated index. This can lead to brief volatility or dips in price.
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Posted on 18 Aug
Geetanjali Lachke
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