Companies in the FTSE 350 ( FTSE 100 and FTSE 250 companies combined) are usually promoted into or demoted out of the indices quarterly through a FTSE reshuffle. And to ensure that the same companies, especially those on the borderline, don’t yo-yo up and down after every reshuffle, index provider FTSE Russell follows a particular rule.
A company must be in the top 90 by market cap to be promoted. Likewise, a company must be below the 110th biggest company to drop out. So, what happens if you hold stocks in an FTSE 100 company, but it gets booted to FTSE 250? Should you sell your stock or continue holding? Let’s find out.
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Why reshuffle the FTSE 100?
At any given time, the largest stocks in the FTSE 250 may grow significantly more than the smallest stocks in the FTSE 100. After all, shares trade daily, and market caps can go up or down. A FTSE reshuffle is helpful to investors as it gives insight into the companies struggling or rising in the big league.
Who dropped out of FTSE 100 in the latest reshuffle?
Cybersecurity company Darktrace and chemicals firm Johnson Matthey were demoted out of the FTSE 100 to the FTSE 250.
Darktrace is a cybersecurity company with an AI that interrupts in-progress cyber attacks in seconds without affecting regular business operations. The company initially saw a strong share price run but lost momentum around November 2021. Large investors started selling their shares, which might have contributed to a slump in its share price.
Johnson Matthey manufactures catalysts, pharmaceutical materials and pollution control systems. But with increasing interest in electric vehicles (EVs), the company’s core vehicular products are threatened. And even though it tried to improve its own battery material business to adapt to the preference for EVs, the competition was too stiff. This could have been one of the reasons why it dropped out of the FTSE 100.
[middle_pitch]
What should you do if a company you hold is booted out of FTSE 100?
Of course, when a company in the FTSE 100 or FTSE 250 is demoted, it gets a lot of attention from the public. That could even cause panic among investors who hold their stock, creating room for poor decisions.
Overall, it’s important to remember that just because a company has been relegated from the FTSE 100 doesn’t mean its outlook is completely negative.
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, recommends keeping calm, reviewing and understanding why a particular company was demoted. The company could just be facing a challenging period and could be promoted back into the FTSE 100 during the next reshuffle. However, this might not always be the case. Carrying out your due diligence is crucial when deciding whether to sell or hold, but don’t make it a panicked decision.
For example, in the case of Johnson Matthey, it could be worth thinking about what will happen once the sale of petrol and diesel cars is banned in 2030. How will this affect the company? Are there plans to shift to another business? If yes, is there any long-term growth for the new business? Asking such questions can help you make informed decisions.
