How DJT Stock Might Become an ETF Holding

Trump’s company surged as much as 50% in Nasdaq debut.

kent
|
Research Lead
|
Reviewed by: etf.com Staff
,
Edited by: Ron Day

Trump Media & Technology Group Corp. (DJT) is now a publicly traded stock on the Nasdaq exchange, jumping nearly 50% in its first day of trading Tuesday.

But will DJT become a holding in an exchange-traded fund? 

Assuming Donald J. Trump’s ongoing legal challenges don’t present a major financial hurdle for the former U.S. president, and his fledgling media company can rise to sustained profitability, DJT stock would still need to pass some relatively stringent selection criteria to be added as an index component. 

Of course, sales and earnings come first and according to Reuters, the so-called SPAC that evolved into Trump Media, Digital World Acquisition, lost $10.6 million from its operations in the first nine months of 2023 on revenue of $3.4 million 

“I struggle to see the value of Truth Social if it’s purely trading on fundamentals,” said Matthew Tuttle, founder of Tuttle Capital Management in Greenwich, Connecticut, in an interview with etf.com. 

There’s the matter of getting a stock included in an index. Many ETFs track a benchmark index, such as the S&P 500, and the process for adding a new stock to an index can be multi-layered depending on the specific index provider and the characteristics of the index itself. 

Also worth noting is that Trump isn't allowed to sell his shares for six months, per a lockup agreement. Furthermore, Trump Media & Technology Group will need to file an 8-K with the Securities and Exchange Commission (SEC) by the end of this week, providing insights into the Truth Social parent company’s fundamental valuation. 

DJT Stock and Index Eligibility Criteria

Stocks don't become members of a stock index by chance. There's a selection process conducted by the index provider (like S&P Dow Jones Indices or MSCI) to ensure the chosen stocks accurately represent the index's objective. For a newly traded stock like DJT to be added to an index, there are multiple factors to be considered. 

By following these selection criteria and maintaining a review process, index providers aim to ensure their indexes accurately reflect the market segments they represent.

Eligibility Criteria 

Most indexes have a set of eligibility criteria a stock must meet before being considered for inclusion. These criteria can include: 

  • Market capitalization (size) thresholds: Indexes might target large-cap, mid-cap, or small-cap companies based on their market value. DJT stock’s market cap is roughly $2.5 billion, which if it can hold that level could enable it to qualify for a small-cap index, such as the Russell 2000, assuming other criteria are met. 
  • Exchange listing: The stock must be listed on a major stock exchange. DJT stock is listed on the Nasdaq, which along with the New York Stock Exchange (NYSE), is an example of a major exchange. 
  • Liquidity: The stock should have a minimum level of trading activity to ensure the stock's price accurately reflects its true value and minimizes any distortions when the index itself is calculated. Newly traded, highly publicized stocks like DJT can have high trading volume early on, but volumes can fall with declining investor enthusiasm. 
  • Profitability: Some indexes might require companies to demonstrate consistent profitability over a specific period. Trump Media and Technology Group’s financials won’t be known until the filing of its 8-K with the SEC, but its profitability will require advertiser revenue, which is speculative at this point. 
  • Float: The tradable shares available to the public might be considered, excluding restricted shares held by major investors. 

Index Methodology

Each index provider has its own methodology for selecting and weighting index constituents. There are two main approaches: 

  • Market-cap weighted: Indexes like the S&P 500 and Russell 2000 weight each stock based on its market capitalization. The larger the company, the greater its weight in the index. If DJT stock's $2.5 billion+ market cap can hold, it could meet this criterion for the Russell 2000 index.
  • Rule-Based: Some indexes use a set of rules to select and weight stocks. These rules might consider factors like industry sector representation, profitability metrics, or investment style (growth vs. value). For example, a media-based index or communications sector ETF might qualify DJT stock, should other criteria be met.

Review and Reconstitution

Indexes are periodically reviewed, typically quarterly or annually. During this review, the index provider assesses whether any additions or deletions are necessary based on the eligibility criteria and the index methodology. 

  • Adding new stocks: If a company meets the criteria and improves its ranking within the target market cap range (e.g., enters the top 3,000 for a large-cap index), it might be added to the index. 
  • Removing existing stocks: Conversely, companies that no longer meet the criteria (e.g., market cap falls below the threshold) or merge with other companies might be removed from the index. 

Bottom Line on DJT Stock as an ETF Holding

DJT stock could become an index constituent and an ETF holding, but only time will tell if Trump’s media company can pass the necessary criteria. While a rules-based factor ETF could add a stock sooner, earning a spot in a major stock index can be a tough climb for any new company.

Index providers meticulously assess a company's size, liquidity, financial health, and industry fit before granting entry. Only those that meet stringent criteria and demonstrate a track record of stability alongside significant market value have a shot at joining the ranks of these established indexes. 

While DJT stock may continue to attract short-term trader enthusiasm, its long-term prospects, and thus its viability to become widely held in ETFs, is yet to be seen. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.