Monday, July 20, 2009

Index Changes at the S&P500 (CIT, RHT)

AlphaNinja - Ouch. This could prove to be very unfortunate timing for the S&P500.

Standard & Poor's announced Friday that Red Hat (RHT) would replace CIT Group (CIT) in the index, as CIT's market value had declined too much:

Today, however, CIT stock is up 90% after reaching a deal with its bondholders. CIT shares looked to be headed to zero before this agreement, which is why S&P made the move it did. With this new deal, bankruptcy should be averted. Dilution for shareholders will happen, but the stock does have the possibility of recovering to levels much higher than this.

Unfortunately this potential recovery will not be shared by the millions of investors who track the S&P500, as CIT will be removed this week. I just spoke to David Blitzer of the S&P Index Committee, and he confirmed that this change is set in stone and will not be reversed due to the recent turn of events. He also noted that due to CIT's weight in the index (basically zero), the recovery in its shares would not have been felt by a large degree. Right he is.

Index weights, and kicking stocks out, are a big reason that our major market gauges can differ from the performance of a broad basket of stocks. Due to light weightings of stocks that previously fell, the average S&P500 stock is up 13% this year, while the actual index is only up 6%.

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