FYI this is not true and has been debunked in newer studies; the reason why it seems true is because companies that enter the SP500 tend to enter it because they're doing well which makes its stock go up. If you control for that factor, presence in the SP500 does not significantly affect the stock price. https://www.newyorkfed.org/medialibrary/media/research/staff...
It’s not about SPY per-se, but about ETFs in general. Addition to spy is likely an addition to many other big volume ETFs. Top stocks also join QQQ which is another highly liquid ETF.
Most market volume according to citi is done by ETFs, approximately 80%.
When said ETFs rebalance at start and end of any particular day, we end up with big movements, much wider than the sideways chop we observe during the day when movement is mostly performed MMs that deal with hedging or dropping options value.
So I don’t think it’s the presence to S&P per se, but presence in big ETFs.
Also that paper is from 2012. Market’s a lot different these days.
To be clear, I am not saying that getting in there implies stock go brr. I am saying that in the context of the whole comment chain, buying spy exposes one to all companies that will enter or be evicted from the ETF, which then theoretically funds the companies which then produce value, which returns back as dividends or growth of stock.
If we look deeper though, buying into ETFs likely means the shares that are exchanged are bought and sold by and to MMs, so a whole lot of value is lost to them.
That theory would only be true in a market without shorts and derivatives. In the real world, hedge funds and market makers will sell into those pension funds, as the underlying asset value has not actually changed, counterbalancing the effect.
Generally, I'd be wary of doing theoretical stock analyses like that. They can be true, but if they're this simple they're almost never true in practice, and if they are then someone is already working on making it not true.
