Arm’s shares seen as a shoo-in for Nasdaq 100, though S&P 500 unlikely

FILE PHOTO: Softbank's Arm holds IPO at Nasdaq Market site in New York

By Suzanne McGee and Lewis Krauskopf

NEW YORK (Reuters) - Newly publicly traded company Arm Holdings is poised to be added to popular indexes such as the tech-heavy Nasdaq 100, although inclusion in the S&P 500 is unlikely, analysts said.

Shares of the British chip designer closed up 24.7% in their Nasdaq debut on Thursday, giving it a market value of $65 billion. The shares edged down 0.7% in Friday morning trade.

Inclusion in widely-followed indexes and ETFs often gives a fresh boost to stocks. Fund managers and investors who benchmark to indexes are also encouraged to hold the shares if they are included in widely-used gauges.

Analysts said on Thursday that Arm was a likely candidate to be added to the Nasdaq 100 index, which measures the performance of 100 of the largest Nasdaq-listed non-financial companies and is a key barometer of big growth stocks.

The index is up about 40% this year, largely due to the performance of a handful of megacap stocks including chip-maker Nvidia, whose shares have tripled this year thanks in-part to excitement over advances in artificial intelligence.

“The Nasdaq 100 is the most likely widely followed index for the company to get added into,” said Todd Rosenbluth, Head of Research at VettaFi. “They can be faster to add megacap growth companies into the index than the S&P 500 or the Russell 1000.”

The smallest company in the Nasdaq 100 is Lucid Group, which has a market capitalization of about $13 billion, so ARM should qualify for inclusion based on its market cap, according to Todd Sohn, technical strategist at Strategas.

However, inclusion in the Nasdaq 100 may take time for Arm shares.

In response to a question about eligibility to the Nasdaq 100, a Nasdaq spokeswoman referred to a methodology document that says a security must have traded for at least three full calendar months, not including the month of initial listing, to be eligible for the index.

Moreover, Sohn said, Nasdaq won't be rebalancing this index until December. Inclusion of Arm shares in the S&P 500, which is the standard benchmark for the U.S. stock market, is far less certain, analysts said.

Jeffrey DeMaso, editor at Vanguard Investment Adviser, said the committee that rules on including and removing companies in the S&P 500 and other products has some discretion. But he and other analysts doubted that an index designed to capture the U.S. economy would include a UK-based multinational like ARM.

The fact that the company is based in the UK "almost says 'no' right out of the blocks to the question of whether or not it's included in any Standard & Poor's index," Sohn said. An S&P Dow Jones Indices spokeswoman referred to a methodology document, but said the company is unable to comment or speculate on index constituent changes. Another potential barrier to inclusion in indexes or ETFs is the amount of its shares available to the public. SoftBank still holds a 90.6% stake in Arm, meaning less than 10% are available to the public, and many ETFs have rules on minimum free float requirements that are above that threshold, analysts said. Still, beyond the major indexes, a handful of tech-focused ETFs - all of which hold Nvidia - were strong candidates to pick up shares of Arm, including the VanEck Semiconductor ETF, the iShares Exponential Technologies ETF and the Invesco AI and Next Gen Software ETF, said Lois Gregson, senior ETF analyst at FactSet.

(Reporting by Suzanne McGee and Lewis Krauskopf; Editing by Ira Iosebashvili and Nick Zieminski)