Facebook (NASDAQ: FB ) has drawn controversy ever since its initial public offering, and in the aftermath of its botched IPO, many investors swore they'd never own shares of the social-media giant. Yet thanks to the recent decision for S&P Dow Jones Indices to add Facebook to the S&P 500 (SNPINDEX: ^GSPC ) effective after the market closes on Dec. 20, any investor who owns an S&P index fund will find themselves having to deal with owning a proportional stake in the company.
Almost two years ago, when Facebook first filed for its IPO, I made the not-very-challenging prediction that sooner or later, this day would come. In large part, it appears that everything has worked out much the way many foresaw -- albeit with some big road bumps along the way.
Facebook's winding road to index stardom
Ever since its IPO, Facebook was almost destined to become part of the S&P 500. Its IPO price implied an overall market capitalization of more than $90 billion, putting it well above the vast majority of existing S&P 500 stocks. Even at its worst post-IPO levels, Facebook remained a far larger market cap than most of its would-be peers in the index.
Since then, several other indexes had been less hesitant to add Facebook to their ranks. Russell's indexes were among the first to include Facebook as a constituent, and as various lockup provisions expired to expand the stock's float, Russell responded earlier this year by boosting the social-media giant's weighting in several key indexes. The Nasdaq 100 brought on Facebook as a member a year ago, giving shareholders in PowerShares QQQ (NASDAQ: QQQ ) the same conundrum that S&P index fund investors face today.
But S&P was reluctant to invite Facebook into the fold as quickly. The index has long had seasoning requirements, forcing companies to develop at least a short track record as a public company before gaining admission. Moreover, Facebook initially offered only a small portion of its overall shares, and S&P has traditionally avoided stocks with limited floats because of the liquidity needs of the institutional investors that track its indexes.
The inevitable spike
After S&P announced its move, Facebook shares soared 4% in after-hours trading as investors anticipated the need for index funds to buy the stock. That's another unfortunate example of the S&P's 500 record of timing, as index investors will now have to buy Facebook shares for more than $50 a piece when they could have spent less than half as much as recently as July.
Regardless, investors shouldn't be too upset at the move. Of every $100 they have invested in an S&P 500 index fund, their Facebook investment will amount to just $0.75 or so. That said, for many, that'll be $0.75 more than they ever expected to have invested in the social-media company.
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