"How do stocks get into the S&P 500?"--S&P...
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>>> How do stocks get into the S&P 500?
Since we're talking about the "index effect," a logical question is "How do stocks get into the index?"
The Standard & Poor's Index Committee makes all the decisions about the S&P 500. The Index Committee is made up of Standard & Poor's professionals with many years of experience, not only with indices, but also with the capital markets. Naturally, neither companies nor any other Standard & Poor's clients play a role in the decision-making process.
Partly because the Committee must keep its discussions confidential, its work is not well understood. However, there are some general guidelines and practices that are used in managing the S&P 500.
First, the index is viewed as the leading companies in leading industries in the U.S. markets and a reflection of the US stock market. It also generally reflects the composition of the economy, except that some parts of the economy are never included in the stock market. Law firms, for instance, are big business in the U.S., but since there are no publicly traded law firms, this sector is not represented in the S&P 500. Of course, since most of the companies in the index have large legal departments, there is some coverage for legal services.
Second, the S&P 500 consists of U.S. companies. There are a handful of non-U.S. companies that have been in the index for decades and are "grandfathered," meaning they will stay in the index since they have been in for so long. But, these would not be added today. Recently, when Chrysler was acquired by Daimler-Benz to form DaimlerChrysler, Standard & Poor's reviewed this issue again and decided to maintain its policy of adding only U.S. stocks to its U.S. indexes.
Third, Standard & Poor's tracks different market sectors - consumer cyclicals, health care, transportation, technology, etc. -- and analyzes how they are represented in the index and in the market. Sector composition is considered in selecting new companies for the index. But when a stock is dropped from the index, its replacement won't necessarily come from the same sector.
Fourth, the Index Committee looks at trading liquidity to assure that investors can buy the stocks selected for the index. Closely-held stocks where a small group has control of a company will often be EXCLUDED from consideration for the index.
Finally, a rigorous fundamental analysis is performed on selected stocks. Since minimizing index turnover is a goal, S&P seeks to add only relatively stable stocks to the S&P 500.
All these considerations come together at the Index Committee's regular meetings. At each meeting, pending corporate actions such as mergers or spin-offs that involve companies in the index are reviewed. Decisions on the exact changes in the index are made and replacements are selected. The replacements are kept secret until a public announcement is made. On rare occasions, there may be unusual trading activity in a stock slated to be added to the index due to investor speculation. When this happens, we sometimes change our selection before the public announcement.
Normally, announcements are made at about 5:15 PM New York Time and are released to the public by the major wire services and posted on the S&P Index Services web site, www.spglobal.com. (Virtually every announcement is also carried on S&P Personal Wealth at www.personalwealth.com.) Only after the public is informed are Standard & Poor's clients or the companies involved notified.<<< |
