Make a Bundle on the S&P's Rejects

All the finger-pointing about last year's debacle in the two leading U.S. stock market indices may have overlooked a couple of guilty parties: the compilers of the indices themselves.

A close look at the performance of the companies that Standard & Poor's added and subtracted from its benchmark S&P 500 index for reasons other than mergers or spinoffs, for instance, shows that inglorious stock picking and an ill-timed move to add more technology may have contributed at least as much to the sharp decline of the index as did deteriorating business conditions.

The S&P 500 is often mischaracterized as a passively managed index of large stocks, but in 2000, its managers became seriously aggressive -- adding (and subtracting) four new stocks each month, on average. In the process, the index was systematically stripped of small and mid-sized value stocks from Jan. 28 to Dec. 11 in favor of large-cap growth stocks -- largely from the technology sector, and at exactly the wrong moment. ...