GMS's Exclusion from S&P TMI and Its Implications for Small-Cap Exposure in ETFs

The recent exclusion of Citigroup Global Markets (GMS) from the S&P Total Market Index (TMI) has sparked renewed scrutiny over the liquidity criteria governing index inclusion and its cascading effects on ETF portfolios. While GMS remains part of the broader S&P Total Market Index, its exclusion from specific segments—such as the S&P 500—underscores the evolving dynamics of market access for mid- and small-cap stocks. For investors relying on total market ETFs to capture small-cap exposure, this development raises critical questions about portfolio rebalancing and risk management.

The Liquidity Barrier: Why GMS Was Excluded

The S&P TMI, designed to represent nearly all publicly traded U.S. equities, enforces liquidity thresholds to ensure index stability. However, companies like GMS may face exclusion if they fail to meet these benchmarks. According to a report by S&P Global, the S&P 500 requires a minimum market capitalization of $22.7 billion and a liquidity ratio of 0.75 (annual dollar value traded divided by float-adjusted market cap) [2]. While the S&P TMI’s criteria are less rigid, firms must still demonstrate sufficient trading activity to avoid volatility risks. GMS’s exclusion likely stems from its inability to satisfy these liquidity tests, particularly amid its recent acquisition by Home Depot for $5.5 billion, which may have disrupted its standalone market presence [3].

Implications for ETFs and Small-Cap Exposure

ETFs tracking the S&P TMI, such as the iShares Core S&P Total U.S. Stock Market ETF, rely on broad diversification across large-, mid-, and small-cap stocks. GMS’s exclusion could reduce the index’s exposure to mid-cap financials, a sector critical for balancing risk in total market portfolios. For instance, the SPDR® S&P Biotech ETF (XBI), which tracks a subset of the S&P TMI, emphasizes liquidity and market cap diversity to mitigate concentration risks [1]. If GMS’s exclusion reflects a broader trend of tightening liquidity criteria, ETFs may increasingly underweight smaller firms, skewing returns toward large-cap dominance.

Small-cap investors, in particular, face challenges. The S&P TMI’s liquidity requirements already exclude the smallest firms, but GMS’s removal highlights the fragility of mid-cap inclusion. As noted by Morningstar, liquidity has become a key component of total cost of ownership (TCO) for ETFs, with secondary market trading and authorized participant activity determining efficiency [4]. A decline in mid-cap representation could force investors to seek alternative strategies, such as niche ETFs or active management, to maintain small-cap exposure.

Portfolio Rebalancing Strategies for Investors

For ETF portfolios relying on the S&P TMI, the exclusion of firms like GMS necessitates proactive rebalancing. One approach is to supplement total market ETFs with targeted small-cap funds, such as the iShares Russell 2000 ETF, which focuses exclusively on small-cap stocks. This mitigates the risk of reduced diversification if the S&P TMI tightens its liquidity criteria further.

Additionally, investors should monitor liquidity metrics for ETFs tracking the S&P TMI. For example, the SPDR S&P Metals & Mining ETF (XME) demonstrates strong liquidity with a 30-day median bid-ask spread of 0.04% [5], a feature critical for maintaining efficient trading during market stress. By prioritizing ETFs with robust liquidity profiles, investors can hedge against the volatility of index composition changes.

Conclusion: Navigating a Shifting Landscape

GMS’s exclusion from the S&P TMI underscores the delicate balance between liquidity requirements and market inclusivity. While the S&P TMI remains a cornerstone for broad equity exposure, its evolving criteria risk marginalizing mid-cap firms, particularly in volatile sectors like financials. For small-cap investors, the lesson is clear: diversification must extend beyond index tracking to include active monitoring of liquidity dynamics and strategic supplementation with niche funds. As ETF providers adapt to these challenges, the ability to rebalance portfolios swiftly will determine long-term success in an increasingly fragmented market.

Source:
[1] SPDR® S&P Biotech ETF [https://www.ssga.com/us/en/intermediary/etfs/spdr-sp-biotech-etf-xbi]
[2] S&P 500 [https://en.wikipedia.org/wiki/S%26P_500]
[3] The Home Depot and its Subsidiary SRS Distribution Complete Acquisition of GMS [https://www.morningstar.com/news/pr-newswire/20250904cl65362/the-home-depot-and-its-subsidiary-srs-distribution-complete-acquisition-of-gms]
[4] Liquid ETFs: Key when market volatility strikes [https://www.ssga.com/us/en/intermediary/insights/market-volatilitys-back-get-in-and-out-with-liquid-etfs]
[5] SPDR S&P Metals & Mining ETF [https://www.ssga.com/ch/en_gb/intermediary/etfs/spdr-sp-metals-mining-etf-xme]