Major S&P Index Shuffle Is Not in the Cards

March 16, 2004 ( - Despite some whispering in the wings that Standard & Poor's may be "cleaning up their indexes," one investment bank does not see the need for a major shifting of index constituents between S&P's large-, mid- and small-cap indexes.

Goldman Sachs, in the firm’s monthly Equity Index Tracker, says much of the talk about remapping of index constituents came after S&P announced   they would be moving their US indexes to float adjustment – changes that will be implemented in two stages in March 2005 and September 2005.   However, even S&P reshuffles some of its constituents, Goldman does not anticipate the transfers to be as significant as those made between 1998-1999.

Pointing to the mass migrations of 1998-1999 as a reference point, Goldman does not see much impetus for change in the coming years.  Whereas 13.6% of S&P MidCap companies were larger than the median S&P 500 company in 1998, and 16.5% in 1999, only 2.4% of the MidCap constituents at the end of 2003 could make that claim.  

Additionally, the S&P MidCap index is not nearly as top heavy as it was at the start of the bull market.    At the end of 1998 and 1999, the top 20 MidCap constituents made up 22% and 23%, respectively, of the entire index. Yet, since the end of the 1990s, the concentration of top-ranked components has waned in the S&P MidCap index to the top 20 making up to 14.2% at the end of 2003.  

Examining the other end of the S&P 500 shows greater concentration in market capitalization there.   The bottom 20 S&P 500 companies contributed 0.26% to the index at the end of 2003, more than double that at the end of 1999.   Goldman says that as the bottom rung of the index becomes more fortified, S&P has less urgency to review the low market capitalization companies in the index.

If a shift does occur, Goldman fingered some possible candidates from the MidCap list to join the ranks of the S&P 500:

  • Gilead Sciences ($11.6 billion market capitalization)
  • New York Comm Bancorp ($8.8 billion market capitalization)
  • Lennar Corp ($8.8 billion market capitalization)
  • D.R. Horton ($8.1 billion market capitalization)
  • Coach, Inc. ($7.5   billion market capitalization)
  • Valero Energy ($7.4   billion market capitalization)
  • Affiliated Computer ($6.5   billion market capitalization)
  • Mylan Laboratories ($6.3   billion market capitalization).
To date, Goldman says there has been one component changes in the S&P 500 so far in 2004 and historically, about 85% of S&P 500 changes resulted from mergers and acquisitions and spin-off activity.    In this case, Caremark Rx’s acquisition of AdvancePCS will increase its market capitalization from approximately $8.7 billion to $14.7 billion, making this company currently outside the MidCap list a likely candidate for the S&P 500.