Being listed on the S&P 500 is a significant achievement for many companies, signifying market leadership and investor confidence. However, companies can also be delisted from this esteemed index, with an average lifespan of about 21 years. Delisting can happen for various reasons and can lead to immediate negative consequences for both the company and its investors, impacting stock prices and market perceptions.
Understanding what occurs when a stock is delisted from the S&P 500 is essential for investors and stakeholders. The reasons behind delisting, its impact, and recent examples provide insight into this aspect of the stock market.
The S&P 500 is not just a list of the 500 largest companies by market capitalization. The inclusion process is carefully considered by the index committee, who meet quarterly to review which companies to add or drop. They also monitor for significant developments like mergers, bankruptcies, or restructuring that might affect index composition.
Inclusion criteria include adequate liquidity (enough market makers or trading volume) and a reasonable share price. The company must be a U.S. company and have had a public offering at least 12 months before. It should contribute to the balance of sectors held within the index. While meeting these criteria is necessary, it doesn’t guarantee inclusion as the committee has discretion when adding new companies. When adding or removing companies, the committee aims to decrease index turnover while ensuring the index represents the large-cap U.S. equity market. The index’s composition changes are typically announced with several days’ notice to allow index funds and other market participants time to prepare for the change. Companies can be dropped from the S&P 500 for various reasons, which can be broadly categorized into voluntary and involuntary delistings. Voluntary Delisting Some companies delist themselves from the S&P 500 or other major indexes. Reasons for voluntary delisting include going private (a company may decide to go private through a buyout, removing itself from public trading, like Dell Technologies Inc. in 2013 and 2018), mergers and acquisitions (if a company is acquired by or merges with another company, it may no longer exist as a separate entity), and reducing costs (some companies delist to cut expenses related to maintaining the criteria for a listing on the index). Involuntary Delisting More commonly, companies are involuntarily removed from the S&P 500 due to failing to meet the index’s criteria. Reasons can include market capitalization decline (if a company’s market value falls below the S&P 500’s threshold), liquidity issues (insufficient trading volume or free float, like Whirlpool Corporation in 2024), financial performance (consistent negative earnings or other financial troubles such as looming bankruptcy), and regulatory noncompliance (failure to meet U.S. Securities and Exchange Commission or exchange requirements). What Happens When a Stock is Dropped From the S&P 500? When a stock is removed from the S&P 500, it typically has significant effects on the stock and its investors. In the short term, there’s often an immediate decrease in stock price due to selling pressure from index funds and ETFs that track the S&P 500.What Happens When a Stock is Added to the S&P 500?
Being added to the S&P 500 is often a significant achievement for a company. It brings several benefits, including increased visibility, a stock price boost, an expanded investor base, a rise in liquidity, and perceived stability. Increased visibility: The addition of the stock to the index brings media attention and greater knowledge from investors. Stock price boost: There’s often an immediate rise in the stock price because of buying pressure from index funds and the ETFs that track them. Expanded investor base: More institutional investors and index-tracking funds will purchase the stock. Rise in liquidity: Trading volumes typically increase, making it easier for investors to buy and sell shares. Perceived stability: Inclusion in the S&P 500 is generally a sign of the company’s stability and importance in the market. Companies Removed From the S&P 500 in 2024 Here are several of the major companies removed from the index in 2024: Whirlpool and American Airlines. Whirlpool, a major U.S. manufacturer of home appliances, was removed from the S&P 500 index in early 2024. Reasons for delisting: significant decline in stock price, underperforming the broader market, and reduced market capitalization. Effects: transition to the S&P MidCap 400 index. Its corporate credit rating was downgraded to BBB-. Its stock dropped to a 52-week low in the days following its removal. The removal of American Airlines (AAL) from the S&P 500 in 2024 reflected broader challenges facing the airline industry and the company’s specific financial struggles. Reasons for delisting: ongoing impact of travel disruptions affecting its finances, high debt levels, and declining profitability compared with industry peers. Effects: decreased investor confidence in the airline sector, potential difficulties in securing favorable financing terms, increased scrutiny of the company’s turnaround efforts. Its stock dropped to multiyear lows following its removal. 10Reduced liquidity: Trading volume may decrease as the stock loses visibility among certain investors. 11Negative sentiment: The delisting is generally received as a negative signal about a company’s prospects. Long-Term Consequences: Reduced institutional ownership: Many institutional investors are mandated to hold a certain amount of S&P 500 stocks (such as index funds). Less analyst coverage: The company may receive less attention from financial analysts if it is not part of the index. Turnaround signal: Some companies use the delisting as motivation to restructure and improve their financial health. 7Companies that fall out of the S&P 500 can be included again. For example, Dell was in the S&P 500 before going private in 2013. The company was relisted in the index Sept. 23, 2024, to mark its 40th anniversary. 12Consequences for Investors Holding vs. selling: Investors need to decide whether to hold onto the stock or sell. This decision should be based on the company’s fundamentals and prospects, not just its index status. Note that selling shares can trigger capital gains or losses, which have tax consequences. Portfolio rebalancing: Those tracking the S&P 500 index will need to sell the delisted stock and buy the replacement to maintain index alignment. Reduced liquidity: Buying or selling large stock quantities may become more difficult without affecting its price.ETSY was removed from the S&P 500. The reasons for delisting include slowing growth rates post-pandemic, increased competition from larger ecommerce platforms, and concerns about the sustainability of its business model. The effects of this removal are reduced visibility among institutional investors and potential challenges in attracting and retaining top talent. The company needs to refocus on core strengths and differentiation strategies. Its stock dropped to multiyear lows following its removal. Other companies removed from the S&P 500 in 2024 include Zion Bancorp (ZION), Comerica Inc. (CMA), Pioneer Natural Resources (PXD), Bio-Rad Laboratories (BIO), and Illumina Inc. (ILMN). As companies are removed from the S&P 500 index, new companies are added to take their place. In 2024, some of the companies added are Palantir Technologies Inc. (PLTR), Dell Technologies Inc. (DELL), KKR & Co. Inc. (KKR), CrowdStrike Holdings Inc. (CRWD), GoDaddy Inc. (GDDY), GE Vernova Inc. (GEV), Deckers Outdoors Company (DECK), Super Micro Computer Inc. (SMCI), Solventum Corporation (SOLV), Vistra (VST), and Erie Indemnity Company (ERIE). If a stock is removed from the S&P 500, you don’t get your money back. You still own the same number of shares in the company. However, the value of those shares may decrease, and it may become more difficult to sell them. Index funds are mutual and exchange-traded funds (ETFs) that track the performance of a specific market index, such as the S&P 500. They provide investors with broad market exposure and typically offer lower fees than actively managed funds. Whether you should keep holding a stock that’s been removed from the S&P 500 index depends on your investment strategy and the specific circumstances of the stock’s removal. Stock prices are often negatively affected following its removal. In any case, it’s important to reassess the company’s fundamentals and prospects. Consult with a financial advisor for personalized advice if needed. Being delisted from the S&P 500 is a significant event for any company, often leading to immediate and negative consequences, such as a drop in stock price and reduced visibility. It can be voluntary because of a merger, going private, a falling market cap, or not meeting other index criteria. However, it’s important to remember that delisting doesn’t necessarily mean a company is doomed to fail. Some companies use this as a chance to restructure, refocus, and potentially return more robust than before. For investors, a stock’s delisting from the S&P 500 should prompt a careful reassessment of the investment.
