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With S&P, You Get What You Pay For

Editor's Note: This is a bonus story from Jon D. Markman, whose commentary usually appears only on RealMoney . We're offering it today to readers. This column appeared March 10 on RealMoney. To read Markman's commentary regularly, please click here for information about a free trial to RealMoney.

In your file labeled "Disingenuous Press Releases," please place the one published Wednesday by the equity index team at Standard & Poor's titled "75% of Non-Technology Issues Recover From Post-March 2000 Crash."

The purpose of the release, it seems, was to blame technology stocks for ruining the performance of the S&P 500 Index over the past five years. And yet it was not clearly disclosed that Standard & Poor's willfully and ruinously stuffed its flagship index full of technology stocks in that fateful year, much to the detriment of millions of investors.

How badly have the tech stocks of the S&P 500 done? According to the press release, only 11 of the 78 tech stocks in the benchmark index are higher today than March 24, 2000, the day the S&P 500 hit its all-time peak. In contrast, 304 of the 404 nontechnology stocks in the index are higher today. That is, 14% of tech stocks are higher, whereas 75% of the rest of the nontechs are higher.

The implication is that the S&P 500 -- on which more than $1 trillion in investment funds ride, due to the misguided indexing craze -- would be a lot higher, doggone it, if not for those pesky techs. Howard Silverblatt, equity analyst at S&P, notes in the release that tech stocks in the index would have to gain 209% from today to get back to 2000 prices. He adds: "On average, most issues within the S&P 500 have recovered. ... The enormous losses of high-cap technology issues have weighed down the market, resulting in a 20% loss."

So whose fault is that, exactly? You won't learn this from its release, but the raw truth is that S&P added two dozen technology stocks to its big-cap index in 2000 -- the most it has ever added in its long history. Most of these were put in the index not to replace companies that had been merged out of existence or were in danger of going bankrupt, but rather because index managers feared losing relevance to the then-soaring Nasdaq 100 (NDX).

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