SPX S&P 500 (INDEXSP): the most important stock market indices in the world

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T-bills end mixed, long-term outlook as US stocks resume
Photographer: Michael Nagle / Bloomberg
The functioning of passive investment indices in times of crisis is already a sub-plot of the following viral drama histrionic on the oil market. It also presents itself as a flash point in actions, as supervisors struggle to press the eject button for injured businesses.

This is an urgent problem for those who manage benchmarks like the S&P 500, where dozens of companies are at risk of being wiped out, at least theoretically, after the stock market crash in March. While being guided by rules-based standards, index compilers must also face the same judgment as everyone else in assessing the market right now: how much of the Covid impact will prove to be permanent?

        "The S&P committee is going to have to decide how long they want to wait before abandoning companies damaged by COVID," said Nicholas Colas of DataTrek Research, who sees more than 30 companies teetering on the brink of deletion. "The S&P 500 is perhaps the most followed passive index in the world, but COVID-19 and its consequences will force its manufacturers to make very active choices."

    Anyone who needs to recall the importance of building a passive index has only to look at the remarkable recovery of the S&P 500 since March, a rebound whose strength is largely due to its weighting in technology stocks and healthcare. health. Less appreciated is the impact of four dozen corporate ejections in the past three years, deletions that have focused on retail, industrial and energy companies, which have suffered the most during the virus.

Extreme volatility can complicate the decisions of indexers.
Companies cut from the S&P 500 in recent years have fallen further in the sell-off

"It was more fortuitous than expected that these companies would get worse," said Keith Gangl, portfolio manager for Gradient Investments. Still, "just by the nature of having less energy and fewer consumers, it certainly benefited the index."

Changes in the composition of the index are made as needed and “changes in response to corporate actions and market developments can be made at any time,” according to S&P Dow Jones Clues. Human judgment is also part of the process: the committee aims to minimize rotation and does not consider crossing the thresholds governing, for example, market capitalization, as a reason in itself to initiate a stock-out.

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“The criteria for addition are for adding to an index, not for continuous membership,” said the 41-page U.S. S&P. Clues Methodology rulebook. “As a result, an index constituent that appears to violate the criteria for adding to this index is not deleted unless the current conditions warrant a change of index. “

The elimination of 30 companies would exceed the annual average over the past three decades and rank among the busiest years. It’s a reminder that even passive structures have active elements, a fact posted last month when an exchange traded fundoverhauled the mix of his future over and over. In stock market indexes, companies are started when they fall below standards related to market capitalization or profitability. But deciding which companies to add requires a little more finesse.

Currently, a business must have a market capitalization of at least $ 8.2 billion for review S&P 500. The liquidity measures must also be sufficient and the sum of the total gains of the last four quarters must be positive, as well as the profits of the last quarter.

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