On July 7, 2026, SpaceX joined the Nasdaq 100 via a newly revised "15-trading-day fast-track" rule from the Nasdaq. However, the S&P Dow Jones Indices Committee, after conducting public market consultation, announced a decision rejecting any proposal to open a fast track for SpaceX, insisting on the hard criterion of "four consecutive quarters of positive GAAP net income." This means SpaceX may not be eligible for inclusion in the S&P 500 until 2027 at the earliest. For the same company, the three major index systems—S&P 500, Nasdaq 100, and FTSE Russell—have provided three entirely different timelines. How exactly are indexes compiled? What kind of companies qualify for inclusion? And when index constituents change, why does the market always experience noticeable fluctuations? A series of upcoming thematic content on indexes and ETFs will step by step unveil the principles behind passive investing.
SpaceX's "inclusion Rashomon" is not essentially a divergence in market sentiment but rather the different eligibility rules set by the three index systems—the Nasdaq 100 used its newly revised rules to grant a green light, while the S&P 500's hard profitability threshold hit the pause button. To understand what's really happening behind such hot topics and to grasp the opportunities and risks that each future index adjustment may bring, the unavoidable first lesson is to understand the index methodology itself: What components does it consist of? Who decides whether a company qualifies and when?
Is Index Methodology the Core Trade Secret?
The essence of an index is a product that requires "credibility." To be recognized by the market and for fund companies to be willing to pay for licensing to develop ETFs linked to it, it must possess credibility. And the methodologies of mainstream indexes are publicly available materials, subject to supervision and scrutiny by all! This is why indices compiled by institutions like S&P Dow Jones Indices, Nasdaq, and FTSE Russell dominate the mainstream—their stock selection rules are transparent, their histories are long, and their sample representativeness has been repeatedly tested by the market. When selecting an ETF, the first thing to confirm has never been how much the fund has risen in the past, but whether the index it tracks accurately follows the target market and whether its methodology adheres to industry best practices.
Below, we've compiled from the index company websites the official methodology documents for the S&P 500 Index and S&P US Index Series, the Nasdaq 100 Index, the Dow Jones Industrial Average, and the Hang Seng TECH Index (full links can be found at the end under "Reference Links"). Feel free to discuss the methodologies of other ETF-linked indices you are interested in the comments section.
Index methodology consists of four components:
Construction: Determines which securities are included or excluded. Specific criteria may include market capitalization size, company headquarters location, trading currency, liquidity, financial metrics like P/E ratio or dividend yield. The screening process for the S&P 500 is illustrated in the diagram below. The reason SpaceX failed to join the S&P 500 was precisely because it did not pass the fourth layer in the diagram—"Profitability Screen·Corporate Profitability Threshold"—the hard rule requiring positive GAAP net income for the most recent quarter and on a cumulative basis for the past four consecutive quarters.
Weighting: Determines the influence each constituent stock has on the overall index performance. Common methods include market-cap weighting, float-adjusted market-cap weighting, equal weighting, fundamental weighting, factor weighting, etc. Indices tracking the same market can have entirely different constituent lists and performance trajectories due to different weighting schemes. For example, the S&P 500 Index uses float-adjusted market-cap weighting, counting only freely tradable shares, so companies with larger market caps and more float have higher weights; the S&P 500 Equal Weight Index does the opposite, assigning equal weight to all 500 constituents with regular rebalancing; while the oldest, the Dow Jones Industrial Average, still uses price weighting, where stocks with higher share prices have greater weight, regardless of the company's market capitalization.
Calculation: Converts constituent stock data into a specific index level. The basic logic is: single stock market cap = share price × shares outstanding; total index market cap = sum of all constituent market caps; index level = total index market cap ÷ index divisor. The "divisor" here is a specially designed technical parameter used to translate huge market capitalizations into easy-to-read index levels. It is adjusted accordingly for major corporate actions like stock splits, dividends, or spin-offs to ensure these events do not cause artificial jumps in the index level—adjustments typically occur after the market close, maintaining continuity between the day's closing value and the next day's opening value.
Rebalance Review: An index is not a static list compiled once and for all. It requires periodic (usually quarterly or annual) re-execution of the selection process, removing companies that no longer meet the eligibility criteria, adding new higher-ranked companies, and updating float share data to accurately reflect the actual tradable share count. Common reasons for a constituent's removal include no longer meeting requirements, being replaced by a higher-ranked company, or corporate events like mergers, privatization, or delisting. The final authority approving this list is the S&P Index Committee—composed of full-time Managing Directors within S&P Dow Jones Indices, with no involvement from listed company executives or external independent members. The committee meets regularly to review according to the publicly disclosed rule framework, but the specific deliberation process for individual constituent changes is not disclosed one by one, which is why the market pays close attention before each adjustment announcement.
Why Does Everyone Care So Much About Who Gets In?
On May 12, 2025, S&P Dow Jones Indices announced that Coinbase would officially join the S&P 500 on May 19, becoming the first cryptocurrency company ever included in the index. Its stock price surged 8.8% in after-hours trading following the news. For many entrepreneurs and investors, inclusion in the S&P 500 index has become a symbolic moment signifying an industry's formal recognition by the mainstream financial system.
Image Source: Coinbase official X (Twitter) account @coinbase, May 13, 2025; Caption: "As the saying goes... First they ignore you, then they laugh at you, then they fight you, then they add you to the S&P 500"
However, a major point of market discussion at the time was MicroStrategy, which held a large amount of Bitcoin and had similarly high market recognition but was ineligible for S&P 500 inclusion due to a $4.2 billion GAAP net loss in Q1 2025. Delving into the financials, Coinbase's selection wasn't due to "hot crypto narrative" but solid performance: $65.6 million net profit in Q1 and 24% year-over-year revenue growth. No matter how strong MicroStrategy's "crypto narrative," as long as its financial statements showed a loss, the profitability threshold in the index rules kept it out.
Does Inclusion Guarantee a Stock Price Rise?
According to its methodology, the S&P 500 Index undergoes quarterly adjustments on the third Friday of March, June, September, and December each year. On the designated index adjustment effective date, the index compilation rules trigger mechanical buy/sell orders. Passive funds tracking the index must buy or sell the newly added and removed companies. The measurable real-money fund flow scale can often reach billions or even tens of billions of dollars. However, to make this "giant whale" (the S&P 500) turn without causing excessive market volatility, the index adjustment mechanism is precisely designed for smooth transitions. Yet, every time adjustment information is released, the resulting market attention and trading sentiment intensify the chase for "inclusion hotspots" for short-term trading, easily leading to the misconception that "inclusion equals guaranteed stock price increase."
Just two weeks ago (August 14, 2026), S&P Dow Jones Indices announced that Reddit would officially join the S&P 500 index before market open on August 18. The news sent its stock price soaring up to 15% in after-hours trading. But the reality is more complex. A significant portion of that 15% gain came from "short covering"—at the time, about 13% of Reddit's float was sold short. After the announcement, these short positions were forced to cover (buy back shares), creating a wave of technical buying unrelated to "passive fund inflows." Coupled with active fund managers anticipating the adjustment and building positions early, by the time passive funds actually entered on August 18, much of the price reaction had already been digested.
Beyond short-term effects, inclusion in an index increases long-term fund flows and liquidity. More importantly, the societal recognition and attention brought by the S&P 500 serve as the most powerful endorsement of a company's overall strength! The New York Fed once analyzed data from companies added to the S&P 500 between 1989 and 2009. Those companies already exhibited stronger momentum before inclusion. The post-inclusion gains were largely a continuation of this "winner keeps winning" momentum, rather than the index constituent status magically creating value. This study has been widely cited as the "S&P 500 Index Effect," becoming one of the most referenced empirical bases in academia and markets when interpreting whether index inclusion truly creates value out of thin air!
Reference Links
S&P Dow Jones Indices Official Announcement: S&P Dow Jones Indices Consultation on Treatment of MegaCap Companies – Results: https://press.spglobal.com/2026-06-04-S-P-Dow-Jones-Indices-Consultation-on-Treatment-of-MegaCap-Companies-Results
S&P 500 Index and S&P US Index Series Methodology (Chinese Version): https://www.spglobal.com/spdji/zh/documents/methodologies/methodology-sp-us-indices-chinese.pdf
S&P 500 Index and S&P US Index Series Methodology (English Version): https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-us-indices.pdf
Nasdaq 100 Index Methodology (English Version): https://indexes.nasdaq.com/docs/Methodology_NDX.pdf
Dow Jones Industrial Average Methodology (English Version): https://www.spglobal.com/spdji/en/documents/methodologies/methodology-dj-averages.pdf
Hang Seng TECH Index Methodology (English Version): https://www.hsi.com.hk/static/uploads/contents/en/dl_centre/methodologies/IM_hsteche.pdf
S&P Dow Jones Indices Official Announcement: Reddit Addition to S&P 500 (August 13, 2026): https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20260813-1484396/1484396_avb54wbs.pdf
New York Fed Research Report: "The S&P 500 Index Effect" (Staff Report No. 484): https://www.newyorkfed.org/research/staff_reports/sr484.html
Disclaimer
This content is for informational and educational purposes only and does not constitute investment advice, an investment offer, or an invitation to buy or sell any financial products. The indices, ETFs, securities, and market views mentioned are solely for introducing index compilation and passive investment mechanisms and do not represent recommendations or endorsements by BIT. Past performance and market reactions to index adjustments are not indicative of future results. Investing involves risks. Securities and ETF prices may fluctuate, and investors may lose part or all of their principal. Investors should exercise prudent judgment based on their own circumstances. Related services and products are subject to applicable jurisdictional laws, regulations, supervision, and geographical restrictions.
