Standard & Poor's has announced that it will be making the switch to free float methodology. In a move that has been anxiously awaited, S&P has said that all of its indexes, including the S&P 500, S&P MidCap 400 and S&P SmallCap 600 will make the switch to float-adjusted market capitalization weights. Standard and Poor's becomes the last major index provider to make the switch. MSCI and FTSE both recently made high-profile switches to the free float methodology.
The move means that S&P will now take into account the publicly available float of each of its index component stocks in determining the index weight. S&P had spend a good deal of time debating the necessity of the move internally and with investors. The free float is somewhat less of an issue with the S&P indexes, and particularly the S&P 500, because most of the float of large U.S. company is already publicly available, and therefore a part of the free float.The transition is scheduled to be implemented over a period of 18 months.
In September 2004 Standard & Poor's will publish procedures and float adjustment factors, and begin calculating a group of provisional float-adjusted indexes. In March 2005 the official index series for the U.S. indexes will shift to partial float adjustment, using float adjustment factors that represent half of the total adjustment; in September 2005 the shift to float adjustment will be completed, the official index series will be fully float-adjusted and the provisional series will be discontinued.
S&P will review the indexes annually in September and adjust index weights at that time to account for changes in float weighting. Throughout the transition period there will always be one official variant of the S&P 500 and each other Standard & Poor's index.
David M. Blitzer, Managing Director and Chairman of the Index Committee, explained that this change reflects extensive discussions with investors and index users: 'Over the last few years providing float-adjusted indices, where the share counts of stocks in the index are adjusted to eliminate strategic blocks of stock and cross holdings, has become increasingly important to investors and index users. Last fall, Standard & Poor's discussed this issue with its U.S. Index Advisory Panel and with others and found strong support for this change.'
Asked about the possible impact on index users, Mr. Blitzer commented, 'Preliminary analyses suggest that the turnover should be comparable to typical annual turnover in the indexes. Further, we have always considered liquidity and investability in qualifying stocks for the indexes, and are providing an extensive transition period. Therefore, the market should take these changes in stride with little difficulty.'
For a comprehensive look at S&P's review of the float weighting of the indexes, read the recent research report on the switch by David Blitzer and Srikant Dash.