S&P 500 Index Effect Makes a Comeback: Why Stocks Pop on Inclusion

The phenomenon known as the “S&P 500 Index Effect” is making headlines again. For much of the 2010s, the once-famous announcement-day price bump for newly added S&P 500 companies had mostly faded. But, according to the latest analysis from Goldman Sachs, this effect is once again heating up, with major implications for investors and the massive ETFs that track America’s flagship index.

Why S&P 500 Inclusion Creates a Price Surge

When a company is added to the S&P 500, its shares often spike. That’s because the S&P 500 is now linked to an estimated $20 trillion in global assets, including trillions held in index funds and ETFs that must buy the newcomer’s shares to accurately track the index. This surge in demand can send prices sharply higher—for example, Block soared 10% and Datadog 15% right after their inclusion announcements, as seen just this year.

The effect is powerful because of the sheer volume of passive money—over $13 trillion—following the index automatically. This pool includes some of the world’s most popular ETFs: the SPDR S&P 500 ETF Trust (SPY) and the Vanguard S&P 500 ETF (VOO).

A Fading Trend—Now Heating Up

Historically, the “index effect” delivered big returns. Announcements in the 1990s averaged a 9.4% price gain for new inclusions. But as strategies evolved, and markets became more efficient at anticipating additions, this pop dropped drastically to just 0.8% by the late 2010s.

Yet, recent data flips the script. According to Goldman Sachs, from 2021 onward, newly included stocks have outperformed the equal-weighted S&P 500 by an average of 4 percentage points on announcement day—with nearly 75% of these stocks topping the index’s return. The source of new inclusions matters, too: companies added directly from outside the S&P MidCap 400 have seen average relative gains of 5.3 percentage points since 2013, while those graduating from the midcap index have actually dipped by 0.4 percentage points.

Why the Comeback? Retail Hype—and Less Predictability

A few reasons explain why this surge is back:

Shift in Company Sources: More S&P 500 additions are coming straight from outside the S&P 400, making them less predictable for traders and index funds to “front-run,” thereby delivering a stronger surprise effect.

Retail Enthusiasm: Recent additions like Coinbase, Super Micro Computer, Palantir, and Datadog were already popular with retail traders, amplifying demand.

Thematic Ties: Many newly added firms are linked to hot sectors like AI or crypto.

Is the Effect Here to Stay?

Goldman Sachs suggests that as long as passive investing dominates and major ETFs like VOO and SPY continue to wield trillions in automatic buying power, the index effect will remain a force to be reckoned with. Specific features—like less predictable additions or stocks already hyped by retail traders—can amplify the effect.

On Deck: Who’s Next?

Analysts are eyeing large-cap standouts with strong liquidity and market-cap profiles. Tech names with buy-and-build narratives or disruptive business models tend to top watch lists. As VOO and SPY prepare their quarterly rebalances, any inclusion announcements could spark fresh buying waves—and another round of fireworks for passive investors.

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