Why KEMET Shares Jumped Today

What happened

Shares of KEMET Corporation (NYSE: KEM) have jumped today, up by 13% as of 10:45 a.m. EDT, after S&P Dow Jones Indices announced that it would be adding the company to the S&P SmallCap 600 index, spurring buying among index funds that track the index.

So what

Among other index constituent changes, KEMET is replacing Astoria Financial in the S&P SmallCap 600, and the change will be effective "prior to the open of trading on Monday, October 2." As you can probably guess, the S&P SmallCap 600 measures the small-cap segment of the U.S. equity market.

Constituents of the index must be U.S. companies, have an unadjusted market cap of $450 million to $2.1 billion, and have at least 50% of shares outstanding available for trading (i.e., included in public float), among other requirements.

Now what

Index inclusion has no direct bearing on a company's fundamentals or financial results, but index funds that track the underlying index are required to buy constituent stocks for tracking purposes. With the change becoming effective next Monday and just three trading days until then (including today), index funds are likely going ahead and starting to purchase shares now. The pop is temporary and does not affect any investing theses, long or short.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.