Facebook Inc (NASDAQ:FB) shares rose more than 3% in premarket trading after it was revealed that the social network would be joining two key indexes: the S&P 100 and the S&P 500. The announcement was made on Wednesday after closing bell. Many have been speculating that this would happen for quite some time.
Why the S&P 500 is big for Facebook
Facebook Inc (NASDAQ:FB) will be replacing Teradyne, Inc. (NYSE:TER) in the S&P 500 and Williams Companies, Inc. (NYSE:WMB) in the S&P 100 index. The social network joins both indexes after closing bell on Dec. 20. This is big news for the company, as many major funds follow these indexes when deciding which stocks to buy.
Morningstar indicates that about 1,300 mutual funds and 13 ETFs (exchange-traded funds) follow the S&P 500, using it as their main benchmark. This means that all of these funds will probably add the company to their holdings after it becomes part of the key index. It also means that more investors may want to buy its shares because it provides validation that Facebook Inc (NASDAQ:FB) is one of the biggest and most important public companies in the U.S.
Average investors may find it easier to buy Facebook Inc (NASDAQ:FB) shares because of major funds’ interest. According to FactSet, the social network is the biggest public company that isn’t part of the S&P 500. It has a market capitalization of approximately $120 billion.
Major funds could pile into Facebook
According to Citi analysts Mark May, Kevin Allen and Nathaniel Brogadir, more than 180 million shares of Facebook Inc (NASDAQ:FB) could be purchased by major investment funds after the company becomes an official part of the S&P 500 and the S&P 100. They estimate that passive funds will buy 180.9 million shares of the social network. That’s about three times the current average daily trading volume for Facebook shares.
The analysts also said “an undeterminable number of shares” might be purchased over time by funds which are actively managed and benchmarked to the S&P 500 and the S&P 100. Citi continues to rate Facebook Inc (NASDAQ:FB) as a Buy with a $57 per share price target.