Afterpay share price surges as ASX 20 inclusion approaches

Afterpay shares rise as index inclusion looms

Investors continue to bid up the price of the buy now pay later juggernaut – with the stock up 15% in the last five sessions.

This comes after it was last week revealed that Afterpay (ASX: APT) would be entering the prestigious S&P/ASX 20 index. Afterpay would replace insurance giant Insurance Australia Group Limited (ASX: IAG) – effective prior to December 21.

2020: Just afterpay it

Afterpay has put in another stunning performance in CY20, rising 259% since January. While others in the space have performed strongly, they have underperformed APT – Zip has risen 47%, while Sezzle has gained a more comparable and equally impressive 224%.

With Afterpay notching up such impressive returns in the short-term, one is left wondering what exactly is driving these share price gains: Are traders and investors – big and small – buying the stock in anticipation of its inclusion in the ASX 20 index?

Michael Kemp asked, in relation to the impact of a stock’s inclusion in an index, in a piece titled Index Funds and Index Rebalancing:

‘Can you profit from buying this stock in the hope it does eventually make the grade and because the index fund managers are then forced to buy it? After all, you know what happens to a company’s share price when there’s plenty of dollars chasing a limited amount of stock.’

There is no easy money in this situation, mind you. Mr Kemp concluded that the inclusion process is a dynamic one, saying:

‘Before you get too excited it is worth remembering that making the grade for one index might mean the stock is getting cut from another. For example when it’s finally big enough to become part of a major index no longer will it be included in a small or mid cap index.’

In addition to being added to the ASX 20, Afterpay will also find itself included in the S&P/ASX 50 Index, prior to the open on December 21.

Xero, which has also rallied over the short term (up 4% in the last five sessions) and up 84% YTD – will also find itself included in the S&P/ASX 50 Index as part of the upcoming quarterly rebalance.

At its last traded price of $147.47 per share, the cloud accounting company had an implied market capitalisation of $21.63 billion.

Oil Search and Vicinity Centres are set to be removed from the ASX 50 on December 21.

ASX indices are rebalanced every quarter, in March, June, September, and December.

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