Index Shake-Ups Boosts Shares Of AMD, Raymond James

S&P Dow Jones Indices, the parent company of many financial market indicators such as the Dow Jones Industrial Average and the S&P 500, announced Friday a notable change to its methodology.

The indices owner announced the following changes:

• Companies included in the S&P 500 index must have a market cap of $6.1 billion or greater versus a prior requirement of $5.3 billion or greater.
• Companies included in the S&P MidCap 400 index must have a market cap of $1.6 billion to $6.8 billion versus a prior requirement of $1.4 billion to $5.9 billion.
• Companies included in the SmallCap 600 index must have a market cap of $450 million to $2.1 billion versus a prior requirement of $400 million to $1.8 billion.

Why The Change?

S&P Dow Jones Indices stated the changes were implemented to ensure that each index appropriately represents its market capitalization range, especially after the strong rally in stocks over the past 12 months.

The change in methodology is standard but doesn't occur often and are reviewed from time to time. The last change occurred in the summer of 2014.

Notable Index Shakeups

S&P MidCap constituent Advanced Micro Devices, Inc. AMD will now be included in the S&P 500 index and will replace Urban Outfitters, Inc. URBN.

Similarly, Raymond James Financial, Inc. RJF and Alexandria Real Estate Equities Inc ARE will leave the midcap index for the S&P 500 index and will replace Frontier Communications Corp FTR and First Solar, Inc. FSLR

Why This Matters

It's impossible to directly invest in an index such as the S&P 500 since it essentially exists on paper. But there are many exchange traded funds, such as the SPDR S&P 500 ETF Trust SPY that mirror the S&P 500's composition to offer an investible product that's directly correlated to the index.

There are other ETFs, funds and investible securities that mirror the index.

Since the index now includes AMD and Raymond James, every fund designed to mirror the composition will need to follow the index's lead and include shares of AMD and Raymond James in their portfolio.

According to the National Bureau of Economic Research, a stock's inclusion in the S&P 500 does increase the value of shares. However, it should be noted studies have found that companies whose shares are removed from the index don't see a corresponding decline in their share value.

This finding is supported by Monday's trading action as shares of AMD are a notable outperformer and higher by more than 3.5 percent. Shares of Raymond James and Alexandria Real Estate are trading slightly higher.

On the other hand, shares of Urban Outfitters, Frontier Communications and First Solar are all trading nearly flat.

See Also:

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