Thursday, 30 March 2023

Business News

Big changes in the S&P 500 Friday highlight power of index providers

Big changes in the S&P 500 Friday highlight power of index providers

The index gurus are at it again. Some of the best-known stocks are getting reclassified on Friday, and that means a lot of money is going to move around. 

Ever wonder why Walmart is classified as a consumer staples stock in the S&P 500, but similar retailers such as Target, Dollar General and Dollar Tree are classified as consumer discretionary stocks?  A lot of other people have wondered as well. 

Friday, that will change. 

Target, Dollar General and Dollar Tree will move from the consumer discretionary corner of the stock market, and join Walmart as consumer staples companies. 

Consumer staples will get bigger; consumer discretionary will get a little smaller. 

Ever wonder why Visa, Mastercard and Paypal, which seem like they’re financials, are actually listed as Technology stocks instead? 

Other people have wondered that as well. 

On Friday, that too will change. 

Visa, Mastercard and Paypal, along with a few other names, will be moved into the financials sector. 

As a result, technology will be a little smaller, financials a little bigger. 

The triumph of indexing: where a stock is placed matters 

Thirty years ago this would all have been of interest to academics, but almost no one else. 

That was before the triumph of indexing and exchange-traded funds. 

Today, there is $6 trillion directly indexed to just the S&P 500, the largest of all the indexes in the amount of money tied to it. There is trillions more that is indirectly indexed. That is, many funds use the S&P as a bogey and try to match their returns without paying a licensing fee to Standard & Poor’s. 

Regardless: $6 trillion is a lot of money.  It’s about 18% of the entire market capitalization of the S&P 500. 

And that’s just the S&P 500. There are thousands of indexes that slice and dice the stock and bond market in endless ways. 

Exchange-Traded Funds (ETFs), which began 30 years ago, enable investors to buy these indexes in a low-cost, tax-advantaged wrapper that can be traded on an intraday basis. The ETF business in the U.S. alone is about $7 trillion, most of it in passive (indexed) funds. 

The people who issue those ETFs (BlackRock, Vanguard, State Street, Schwab and a handful of others), for the most part, do not own the indexes that are behind the ETFs.  They license those indexes from index providers.  The largest are Standard & Poor’s, MSCI, and FTSE Russell (which is owned by the London Stock Exchange Group). 

And the people who manage what goes in, and comes out of…

Click Here to Read the Full Original Article at Top News and Analysis (pro)…