In February, I warned you: Like it or not, it was just a matter of time before you'd own Facebook . Next week, millions of investors who use certain types of index mutual funds or exchange-traded funds to invest will find themselves holding a stake in the social-media giant.
Later in this article, I'll explain just how all-pervasive Facebook ownership is likely to get in the coming months and years. First, though, let's do a quick recap of how far Facebook has come and what the latest announcement from Nasdaq OMX Group means for the company and for you.
Nasdaq's on board
Late Tuesday, the Nasdaq said that it would add Facebook to its Nasdaq 100 index. The stock will trade as part of the index beginning on Dec. 12, and it will replace Indian outsourcing specialist Infosys among the list of 100 largest nonfinancial stocks that list shares on the Nasdaq exchange. As a result, the investors who have put more than $30 billion in assets into the PowerShares QQQ ETF should find themselves owning a block of Facebook shares in the near future after its next quarterly reconstitution and rebalancing.
In the past, index-change announcements have led to blockbuster moves for the stocks involved. For instance, when Google joined the S&P 500 in 2006 a couple of years after it first went public, the stock soared 7%. Even Berkshire Hathaway got a nice bump when the S&P 500 finally let it in the door, which happened as a result of its buyout of Burlington Northern and the subsequent splitting of its Class B shares that provided much-enhanced liquidity for the stock. Berkshire's shares jumped 5% the day after the announcement and as much as 12% in the days that followed. But nothing as significant as that happened yesterday, with Facebook shares rising less than 1% and Infosys losing just a percent and a quarter.
To be fair, the move comes as no surprise to investors who were paying attention. Back in August, Fool contributor Rick Munarriz said, "It would be a shock if Facebook isn't added to the Nasdaq 100," accurately predicting that this month was the most likely time frame for inclusion. With last month's expiration of lockup provisions that had previously tied up hundreds of millions of Facebook shares, the company now has enough publicly traded shares available to make it viable for index-tracking institutions to get the shares they need without disrupting the market.
Next stop: S&P 500
The real prize for Facebook will come when Standard & Poor's decides to add the company to its benchmark S&P 500 index. Although the Nasdaq 100 has a fairly large number of followers, the S&P attracts more than half a trillion dollars in assets -- nearly 15 times the money invested in direct Nasdaq-tracking funds.
One thing that will hold up Facebook's becoming part of the S&P 500 is the requirement that the company report four quarters of positive earnings as a public company before it qualifies for inclusion. But with two quarters of net profits already under its belt and analysts already projecting similarly profitable results in both its current quarter and the first quarter of 2013, it would take a highly unexpected setback for Facebook not to become eligible on that basis.
The pros and cons of indexing
Many index investors will be greatly disappointed that their funds will have to buy shares at levels nearly 50% more expensive than they were just a month ago. But unfortunately, the nature of index investing makes such inefficiencies common, as index fund managers are locked into rigid investment objectives that require them to track indexes as closely as possible. The cost advantages make their performance hard to beat, but index investments take away your latitude in picking and choosing which stocks make it into your portfolio. In Facebook's case, that might simply add insult to injury for the millions of investors that suffered in its initial public offering.
So with index funds jumping on board, is Facebook a buy if you can get in before they do? Our premium research report on the social network has a lot to say about Facebook's opportunities, challenges, and prospects for the future. Access your report by clicking here.
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