What Happens to Stocks After Joining the Nasdaq-100 (History Has a Clear Answer)

Joining the Nasdaq-100 represents a big milestone, as it includes the biggest non-financial companies on the Nasdaq. The idea is, once a company joins, it may see its share price advance as managers of funds tracking this index buy shares -- since their funds must mimic the index's performance, they have to make these additions.

The Nasdaq-100 rebalances annually to remove certain members and add new ones, and it also may add members at other points in the year. And this brings me to the reason why the Nasdaq-100 has drawn attention in recent times. The index adjusted its admission rules to allow companies in sooner after their market launches than ever before -- and that resulted in Space Exploration Technologies (NASDAQ: SPCX) joining the Nasdaq-100 earlier this month.

So now, with SpaceX newly in the index, investors may be wondering: What happens to stocks after joining the benchmark? History has a clear answer.

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An Elon Musk-led company

So, first, a note about SpaceX. The company, a giant in rocket launches, satellite-based connectivity, and artificial intelligence (AI), has drawn great attention from investors due to this dynamic mix of businesses. And some investors also like the idea of being involved in a business led by Elon Musk. Also at the helm of electric vehicle giant Tesla, he's known for his commitment to innovation.

SpaceX's IPO, the world's largest, was massively oversubscribed, and the stock rose right out of the gate, gaining 67% from the IPO price of $135 to a peak of $225 on June 16. And the company's trillion-dollar valuation helped it land a spot on the Nasdaq-100 on July 7, about 15 days after its launch as part of the index's new "fast track" rules. Prior to this, a company had to wait at least three months for inclusion.

So far, the Nasdaq-100 addition hasn't brought SpaceX lasting gains. The stock has declined from its peak, and as of the July 17 market close, SpaceX traded at $123.99, significantly below its IPO price.

New additions to the Nasdaq-100

For some clues about what may happen next, let's turn to history. We'll consider some of the new additions to the index over the past three years and their performances in the two months following their entrance.

As we can see, six out of 10 stocks advanced during this time period. But in the case of Seagate Technology and Western Digital, we can't attribute the movement to entrance in the index: Both companies are involved in the booming AI memory and storage businesses, and stocks in the industry have soared this year.

So history offers us a clear answer: While a stock may see a bit of upward momentum around the time of its addition to the index, it's generally limited in size and duration. In some cases, it's hardly even noticeable.

SpaceX has echoed this, advancing slightly right after the addition. But then the stock plummeted in the days to follow.

SPCX data by YCharts

Look to earnings

What does this mean for you as an investor? A stock's entry into a particular index isn't a reason to add that player to your portfolio. It's great that a company is acknowledged as a giant of the times, but this doesn't necessarily make it a fantastic investment. Instead, investors should look to the company's earnings track record, or if the company isn't yet profitable, consider its path to profitability: Does it have a clear roadmap and goals that are attainable? And it's important to consider your own investment style too.

For example, SpaceX isn't yet profitable, and some of its biggest goals rely on technology that hasn't yet been proven -- if the company reaches its goals, it may be a smashing success, but along the way, the stock carries a significant amount of risk. So, while SpaceX may be appropriate for a very aggressive investor, it's not the best choice for a cautious investor.

History offers us a clear message: Nasdaq-100 membership, while exciting, isn't the key to stock performance. All of this means it's a better idea to turn our attention to the company's -- whether it's SpaceX or another -- next earnings reports and progress toward goals.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alnylam Pharmaceuticals, Axon Enterprise, DoorDash, MongoDB, Palantir Technologies, and Western Digital. The Motley Fool recommends Roper Technologies. The Motley Fool has a disclosure policy.