Eau De Stooge

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What's going on?

The Russell 3000 index underwent its annual rebalancing on Friday, and its clear that SPACs once the outsiders of the investing world are well and truly part of the corporate in-crowd.

What does this mean?

The Russell 3000 which aims to be a benchmark of the entire US stock market measures the performance of the 3,000 most valuable listed US companies and represents approximately 98% of the value of all American stocks. And once a year, its rebalanced: that is, the companies that are too small to qualify are removed, and those that have grown in value are added. So far, so normal. Whats unique about this rebalancing is that 20% of the newly added companies are firms that joined the stock market by merging with a special-purpose acquisition company (SPAC).

Why should I care?

Zooming in: Theres no escaping SPACs.

Some investors are still skeptical about SPACs, and with fair reason: the companies have to agree a merger within two years of listing or else return the cash they raised, which means they might strike deals for the sake of it. Regulatory issues surrounding Lordstown Motors and Nikola wont have done much to change their minds either. Now, though, theyll have no choice but to accept SPACs, which as part of a major index will be included in the passive funds some of them track.

For markets: Cue the upheaval.

A companys stock price tends to get a lift when it joins the Russell 3000, as investment managers and passive funds which have around $10.6 trillion tracking Russells US indexes collectively rush to buy up its shares (tweet this). The reverse is true too: investors tend to ditch the shares of anything that leaves the index. So when you consider that more than 250 companies were estimated to be added on Friday, you can bet therell have been a lot of volatility for investors to contend with.

Originally posted as part of the Finimize daily email.

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