At the same time, weightings will rise for companies without large closely held stakes. The big gainers, according to Mr. Jamison: General Electric Co., which will climb to 3.27% of the indexes from 3.07%; and ExxonMobil Corp., to 2.78% from 2.62%.
David Blitzer, managing director and chairman of the S&P Index Committee, said in an interview that a number of details are still being worked out. However, there is a plan to calculate provisional, or temporary, float-adjusted indexes for use as interim benchmarks if investors choose.
S&P decided to shift to float-adjusted weights because many company investors wanted it, Mr. Blitzer said. "Some pension consultants had told their pension funds they couldn't use our indexes because they weren't float-adjusted, which we took into consideration," Mr. Blitzer said. However, several consultants contacted by P&I had not heard of pension funds unable to use S&P indexes.
James McKee, vice president-capital markets research at Callan Associates, San Francisco, said he doesn't believe not having a float is a material event for investors in U.S. indexes, because, "in the U.S. you don't have the massive insider holdings you do in countries like Germany and Japan … to sacrifice liquidity to do this is being overzealous," he said.
And Roger Fenningdorf, partner and head of research at Rocaton Investment Advisors LLC, Norwalk, Conn., said, "We prefer a float-adjusted index because it's a better reflection of what can be traded in the market. We think the change is a positive. But given the dominance of the S&P 500 in the U.S., that's been the de facto proxy and we've always used it."
Float-adjusted indexes — such as those offered by Russell Investment Group, Tacoma, Wash. — have become more popular with investors in the past six to eight years, Mr. Blitzer added. "The research S&P conducted on changing the weightings suggested that there would be no substantial change in the level of risk or performance."
The changes will result in a reduction in the total market capitalization of the S&P 500 to about $9.9 trillion, a drop of around $800 billion, estimated Patrick O'Connor, senior portfolio manager in the indexing group at Barclays Global Investors, San Francisco. He noted these are preliminary numbers and that S&P hasn't yet said how it is doing its calculations.
The impact on the other two indexes would be a lot less. The MidCap 400 would be reduced to $870 billion from $1.03 trillion and the Small Cap P 600 would be reduced to $379 billion from $457 billion.
At BGI, "we'll treat the changes like any other rebalancing, and look for liquidity. We may look to add value and develop trading strategies. But depending on what happens, we may not need strategies," Mr. O'Connor said. "We might wait to trade if a stock is oversold. We don't want to crush a stock." BGI has $584 billion in passive equity strategies; of which $218.5 billion is pegged to the three affected indexes.
Mr. O'Connor and other managers observed that the long phase-in is being done to mitigate volatility. But they cautioned it's impossible to say how much volatility could result from the changes.