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Index membership is built-in demand
Built-in demand
Many ETFs follow stock indexes, and an ETF has to hold the shares in the index it tracks. For a company about to sell shares to the public, that is demand that comes built in, which is why getting into an index is such a draw.
Nasdaq's rule change
Earlier this year the Nasdaq changed a rule, just for SpaceX, so that a newly listed company can join the Nasdaq 100 within about 15 trading days. It used to take much longer. SpaceX listed on the Nasdaq in an $86 billion IPO, the biggest of all time.
The NYSE's position
The New York Stock Exchange has no index business, so it has no equivalent pull for companies choosing where to list. It points to good listings of its own and to companies that have moved over from the Nasdaq, and it is making moves to restart its engine.
How do index funds buy a newly added stock?
An index fund aims to hold each stock in the same proportion as the index. When a company is added, funds must buy its shares by the date the change takes effect, and many do so at the closing price that day. That concentrated buying can lift the price. Researchers Lawrence Harris and Eitan Gurel documented such price jumps for S&P 500 additions in a 1986 study.
What is the Nasdaq-100?
The Nasdaq-100 tracks 100 of the largest companies listed on the Nasdaq exchange, excluding financial companies. It is weighted by market value, so the biggest companies move it the most. The Invesco QQQ fund, launched in 1999, is one of the largest ETFs tracking it. Every fund that follows the index must hold its members.
How does an ETF stay matched to its index?
Large financial firms called authorized participants create and redeem ETF shares. They deliver a basket of the underlying stocks to the fund and receive new ETF shares in return, or the reverse. This keeps the ETF's price close to the value of the stocks it holds. The fund itself does not need to trade each time investors buy or sell.
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