Facebook Inc (NASDAQ:FB) shares are likely to be hot today as Standard & Poor's added the social networking site to the S&P 500 and S&P 100 indexes. Facebook will replace Teradyne, Inc. (NYSE:TER) and be the 30th largest company by market-cap in the S&P 500.
Shares are up on the news as funds that are based on the S&P 500 and 100 will have to rebalance their portfolios by selling TER and buying FB. It will be more complicated than just putting money from bucket TER into bucket FB. For our purpose, we are going to focus on the potential impact on Facebook's share price for just the S&P 500 membership.
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The first thing we have to understand is that the S&P 500 is market-cap weighted. For example, if company A's market value (shares outstanding X current price) is $10 and company B's market-cap is $1, then A's weighting is 10 times B's weighting in our two company example. We hope that makes sense.
So, we broke out the trusty screener, loaded up the S&P 500 stocks, took out Teradyne, and replaced it with Facebook. From there, we tallied the sum of the parts and calculated each company's weighting as a percent of the benchmark index based on Wednesday's closing prices.
The excel spreadsheet says that FB's market-cap weighted share of the index pie is 0.71%. OK, on the surface, that might sound like a small figure, but let's consider some facts before judging a value by its size.
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According to Morningstar, 1,300 mutual funds and 13 ETFs use the S&P 500 as their benchmark, and will have to add FB after it's added to the new indexes on December 20, 2013. That's sounds much better than 0.71% - right?
Think about this, S&P reports "There is over USD [US Dollar] 5.14 trillion benchmarked to the index [for performance comparison] with index assets co! mpromising approximately USD 1.6 trillion of this total." In other words, there is roughly $1.6 trillion in S&P 500 index funds – that's a lot of cheese.
Now, we can do some math. Using FB's 0.71% of the total S&P 500 market cap, and multiplying it by $1.6 trillion, we come up with $11.36 billion of necessary buying for all those mutual funds and exchange-traded-funds we mentioned a few paragraphs ago.
At last night's close, S&P 500 index fund managers would have to buy 230,052,653 shares to be square with Facebook's weighting. That's 9.4% of all FB's outstanding shares and would reduce FB's float (stock available for trading) by 14%.
No matter how you slice it up, Facebook Inc (NASDAQ:FB) should have significant buying support in the days and weeks ahead as money managers rebalance and get their S&P 500 funds in-line.
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