Coinbase and Robinhood Didn't Make the S&P 500. They May Be Too Volatile. — Barrons.com
Coinbase and Robinhood were not included in the S&P 500 index due to their high volatility, as revealed by S&P Dow Jones Indices. Only TKO Group, Williams-Sonoma, and DoorDash were added to the index, raising questions about the exclusion of larger candidates. Both Coinbase and Robinhood have high beta values, indicating greater fluctuations compared to the market, which may have influenced their omission. The criteria for S&P 500 inclusion include market cap, positive net income, and other factors, but volatility can still lead to exclusion despite meeting the requirements.
By Mackenzie Tatananni
Coinbase Global and Robinhood Markets were thought to be contenders for inclusion in the S&P 500 last week, but failed to make the cut. Volatility could be to blame.
On Friday, S&P Dow Jones Indices revealed its quarterly changes to the index, which tracks the 500 largest publicly listed companies by market capitalization. The additions and deletions will go into effect March 24.
Ahead of the announcement, Barclays analysts held out seven stocks in their coverage as potential contenders, including crypto exchange Coinbase and trading platform Robinhood.
Investors also had their eyes on AppLovin. With a market cap of $88.3 billion, the mobile technology company was the largest of all the possible candidates.
Ultimately, just three companies — TKO Group, Williams-Sonoma, and DoorDash — were added to the S&P 500, raising questions as to why some of the bigger candidates were excluded. Out of seven stocks identified by Barclays, DoorDash was the only one to make it.
Clues may lie in the stocks' beta, a measure of their volatility compared with the broader market. A beta greater than 1 indicates a stock fluctuates more than the market, while a beta less than 1 means it is generally less volatile.
Stocks added to the index in 2024 have an average three-year beta of 1.046. For TKO and Williams-Sonoma, this metric was 0.95 and 1.73, respectively. DoorDash was the most volatile, with a 3-year beta of 2.11.
By comparison, AppLovin's beta was 2.16 and Robinhood's was 2.35. At 3.78, Coinbase had a beta that was more than three times the average for all companies added last year.
AppLovin has declined sharply from its all-time high of $510.13 in mid-February. Shares tumbled on the heels of reports from short sellers Fuzzy Panda Research and Culper Research, which claimed the mobile advertising platform created ads that violated of the terms of the Google and Apple app stores, among other offenses. Nevertheless, the stock has still gained 320% over the past 12 months, and was the top gainer in the Nasdaq 100 last year.
Coinbase and Robinhood have fluctuated for a different reason. Both platforms are used to trade cryptocurrencies, which are historically more volatile than the market. Bitcoin, for one, has been subject to bouts of instability as investors wait for clarity on the Trump administration's plan for digital currencies.
A company must meet a lengthy list of criteria to be considered for S&P 500 inclusion. It must be U.S.-domiciled and listed on an eligible U.S. exchange. Stocks trading on the OTC Bulletin Board and pink sheets are barred from consideration.
Furthermore, a candidate's market cap must be greater than $14.5 billion, with the primary listing's float greater than 50% of the market cap. The company's sum of GAAP net income over the four most recent consecutive quarters must be positive, as well as for the most recent quarter.
While there's no blanket ban on volatile stocks, a company could meet all of the criteria and still be passed over. An index committee determines which stocks are added and removed, and volatility and sector diversification could play a role.
Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
