U.S. Companies Will Replace Seven Foreign Firms in S&P; 500
Standard & Poor’s said Tuesday that it would make an unusually big change to the S&P; 500 index of blue-chip stocks, replacing the index’s seven remaining foreign companies with seven U.S.-based firms.
After the close of trading July 19, these companies will be removed from the index: Royal Dutch Petroleum, Unilever, Nortel Networks, Alcan Inc., Barrick Gold Corp., Placer Dome Inc. and Inco Ltd.
Added will be United Parcel Service Inc., Goldman Sachs Group Inc., Prudential Financial Inc., EBay Inc., Principal Financial Group Inc., Electronic Arts Inc. and SunGard Data Systems Inc.
The make-over was prompted by S&P; rules aimed at eliminating index overlap and tailoring products for asset-allocation purists. It will make the S&P; 500 “a better reflection of the large-cap segment of the U.S. equities market,” said David Blitzer, head of the committee that chooses S&P; index members. S&P; is a division of New York-based McGraw-Hill Cos.
The two European companies and five Canadian companies were “double-counted” in the S&P; Global 1,200 index, and their elimination from the S&P; 500 resolves that issue, S&P; said.
The change puts all S&P; 500 members in compliance with current selection criteria, which require members to be U.S. companies, S&P; said. The seven companies entered the index--some as far back as 65 years ago--before the guideline was in place and before S&P; established a series of global indexes. Tyco International Ltd., based in Bermuda, is considered a U.S. company by S&P;, said spokesman Michael Privitera.
Brad Pope, a strategist at Barclays Global Investors in San Francisco, said the shift would mean about 2% turnover for the S&P; 500, the biggest change this year.
Pope said the move “helps make the index cleaner.” Nortel, for example, was a concern of some clients, because the telecom company was a big component of the Canadian stock market but also was included in the S&P; 500.
Max Isaacman, author of “How to Be an Index Investor” (McGraw-Hill, 2001), said that although several of the new companies are in the tech and financial sectors, the long-term effect on S&P; 500 performance may be minimal.
“Ultimately, the S&P; 500 is going to react as the U.S. economy reacts,” he said.
S&P; said the effect on the stock prices of companies added to or deleted from the index tends to be short-term. On average, deleted stocks lose 11.7% between announcement and effective dates, S&P; said, but those losses are made up by the sixth trading day after the change.
Pope said it would be “interesting to watch” whether such swings are magnified this time by “the sheer impact of so many changes at once.”
