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Standard and Poor's (S&P) took the first of two steps in transitioning its broad U.S. index family to the free-float weighting system on March 18, becoming the last of the major U.S. index family to embrace the free-float methodology. Free-float weighting adjusts the market capitalization-based weights of index components to reflect only those shares that are publicly available for trade. Shares held by insiders, founders and other corporations are excluded. The methodology aims to boost the liquidity of the index, which can be compromised when a large portion of shares in a company are privately held. "There's been a growing consensus over the past three to five years that float adjustment is really the right approach," says David Blitzer, chairman of the Index Committee at S&P. "There are liquidity benefits, especially for small- and mid-cap stocks, which help make running index funds a little bit easier." The change covers the S&P 500, S&P MidCap 400, S&P SmallCap 600 and S&P REIT Composite indexes. S&P's global indexes adopted the free-float methodology in 1997. To smooth trading, the adjustment will take place in two stages: The index moved halfway to full float adjustment on March 18, and will complete the transition on September 16. Companies with large insider holdings will feel the largest impact. Wal-Mart, for instance, will take the largest hit of any company in the S&P 500, as insiders hold 40 percent of its shares. When the final adjustment is complete in September, Wal-Mart's weight in the large-cap index will drop from 2.11 percent to just 1.32 percent. Index funds will have to sell approximately 170 million shares to account for the change. Despite the large share counts involved, however, S&P hopes that there will be minimal disruptions in the marketplace. "We announced plans for this change last year and are making the transition in two stages, which really left the ball in the court of the indexers in terms of timing," says Blitzer. "There's been very little difference between the performance of the float-adjusted and classic indexes since we announced the change last year, which means that indexers have and continue to have the opportunity to move at any time." S&P expects the change to have minimal influence on index performance: Despite the large share counts involved, there's no substantial change to any index in terms of sector breakdown, stock concentration or other definable risk factors. |
