S&P 500 Losing Weight

Look for mild volatility as fund managers tweak their positions ahead of rebalancing.
By Gregg Greenberg ,

Dozens of companies will see their representation in the

S&P 500

change Friday as Standard and Poor's switches to a system that bases a company's weighting in the index on how many of its shares are available for public trading.

Previously, the index apportioned weightings according to overall shares outstanding, encompassing stock that is owned by company insiders and early investors that isn't part of the public float. S&P's believes the change will enhance liquidity.

Since many index funds must mirror the S&P 500, the switch could increase trading and price volatility in the stocks involved, as fund managers re-balance their portfolios.

Still, David Blitzer, chairman of the index committee at S&P, doubts there will be a mad rush by index fund managers to make the change in today's trading. He notes the switch has been in the news since last October.

"Given the amount of phone calls we have been getting, most index fund managers have already made the necessary changes," says Blitzer.

The overhaul will result in retailing powerhouse

Wal-Mart

(WMT) - Get Report

and beverage giant

Coca Cola

(KO) - Get Report

losing some of their wide influence within the S&P 500. Both companies have large blocks of shares closely held by family members.

Microsoft

(MSFT) - Get Report

and

Nike

(NKE) - Get Report

are also expected to see adjustments.

Traders may try to take advantage of the changes by shorting stocks which will see reduced representation. An alternative strategy would be to buy stocks that might see their positions expanded, such as

ExxonMobil

(XOM) - Get Report

and

General Electric

(GE) - Get Report

.

Nevertheless, Blitzer says most index fund managers have grown adept at dealing with index changes. He points to the fact that there is no longer excess volatility in a particular name when it is added to or subtracted from an index. He expects a similarly muted effect today, even in widely watched names like Wal-Mart.

"The trading has already taken place in Wal-Mart," says Blitzer. "Either you made the change or you've been asleep for the past few months."

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