Vancouver-based athleisure fashion retailer Lululemon Athletica Inc. (Nasdaq:LULU) is set to join the S&P500 on Oct. 18 to replace Activision Blizzard (Nasdaq:ATVI), which Microsoft Corp. (Nasdaq:MSFT) today closed a US$68.7 billion deal to buy.
Another changeup in S&P Global's major U.S. stock exchange is that it will add Hubbell Inc. (NYSE:HUBB) and drop Organon and Co. (NYSE:OGN). Hubbell makes electrical and utility solutions while Organon is a pharmaceutical company.
Lululemon's share price spiked nearly five per cent after hours, when the announcement was made.
Leith Wheeler CEO Jim Gilliland explained to BIV that the reason why the share price spiked after hours is that many fund managers operate index funds that aim to replicate the stocks in the S&P500 in accordance with the weight of that company in the index.
Those fund managers are likely to add Lululemon shares to their portfolios or index exchange traded funds (ETFs) near the end of the day on Oct. 18 and try to replicate purchase prices with the shares' end-of-day price.
Some investors in after-hours trading today were trying to capitalize on that bump in purchases next week by buying shares immediately. They may then sell into the bump in buying activity.
State Street Global Advisors, for example, runs one of the world's biggest and most widely traded index ETFs, known as the Standard & Poor's depository receipt (SPDR) S&P500 ETF Trust (NYSE:SPY). That fund aims to mirror the S&P500 index.
"If you have a company like Activision being taken out, then the capital that was invested in Activision gets redeployed," Gilliland said.
The S&P 500 index is managed by S&P Global and it has a committee that determines which stocks are included in its index, Gilliland said.
"Their index committee is basically a group that decides which names best represent the largest 500 companies," he said. "It's not purely mechanical. There's a little bit of discretion as to which ones get included but, in general, they would look at the largest 500 companies.
Lululemon's market capitalization is about US$47.8 billion.
Its share price is up about 16.8 per cent year-to-date.
