By Michael Wursthorn
Shares of ServiceNow Inc. are getting a taste of the "inclusion effect."
The cloud-software company's stock got a boost this week after S&P Dow Jones Indices, the company that manages the S&P 500 benchmark, said it would add the stock to the broad index before the opening of trading Thursday. Shares are up 5% over the past two trading sessions since the announcement and are trading above $280, extending their gain for the week to nearly 8%, the best weekly run since April.
Stocks tend to get an immediate boost on news that they will join a major index such as the S&P 500. Nearly $10 trillion tracks the broad index through passive funds, and fund managers benchmarked to the S&P 500 or sectors related to the newly added stocks move to take the latest index constituent into account.
But the index inclusion effect doesn't last long, research has shown. A study by Ned Davis Research found that new additions to the S&P 500 between 1973 and last year rose a median of 17% in the year leading up to their inclusion. A year later, those stocks usually lagged behind the S&P 500.
That same scenario played out with T-Mobile US Inc. this year. The wireless carrier rose 25% between December and mid-July, just before it was added to the S&P 500. Shares have fallen 2.6% since its inclusion.
Home builder NVR Inc. also had a big gain prior to its addition to the S&P 500. The company's shares jumped 47% this year through Sept. 25. Since joining the broad index on Sept. 26, shares have gained just 2%.
Some stocks have bucked the trend, however, thanks to solid corporate profit reports. MarketAxess Holdings Inc. is up 26% since it joined the S&P 500 in early July, building on its 53% rise between December and June.
One thing going for ServiceNow is a string of strong earnings this year, which have pushed shares up 58%. Some of its biggest gains followed corporate earnings reports, and analysts forecast another quarter of growth for the final three months of the year.
The company went public in 2012 at $38 a share.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com