What happened
Shares of Enphase Energy (ENPH 0.62%) have popped today, up by 17% as of 1 p.m. EDT, after S&P Dow Jones Indices announced that it would be adding the company to the S&P MidCap 400 index. Enphase will replace Core Laboratories in the index.
So what
A couple unrelated companies that were previously in the S&P SmallCap 600 have filed for Chapter 11 bankruptcy, making them ineligible for inclusion in that index. In response, the index provider is making some adjustments by moving companies from the S&P MidCap 400 to the S&P SmallCap 600 and replacing those companies in the S&P MidCap 400.
Image source: Getty Images.
Enphase makes inverters for the solar energy industry, while Core Laboratories provides services for the oil and gas industry. Core Laboratories will join the S&P SmallCap 600.
Now what
Index changes don't impact a company's underlying fundamentals, but the action can create buying or selling activity for the impacted stocks as mutual funds or ETFs that track the particular index are then required to buy or sell in order to continue accurately tracking the index. In this case, any fund that tracks the S&P MidCap 400 would be required to sell Core Laboratories and buy Enphase. The more prominent the index, the more pronounced this trading activity would be, as there would be more funds tracking the index.
Additionally, there is a certain amount of prestige and validation that comes with index inclusion.
