Stocks removed from the
fell sharply on Wednesday, as funds that are linked to the benchmark index dumped those shares. But investors should take some comfort from the fact that a deletion usually has little long-term impact on share prices.
In fact, some companies that have been deleted from the S&P 500 have actually fared better than some that were added this year.
Standard & Poor's said it was removing seven foreign stocks from the S&P 500 index and replacing them with U.S. firms in order to make the index more representative of the performance of large-cap U.S. stocks. The switch was also intended to avoid duplication in the calculation of its global index.
Stocks due to be yanked from the index fell between 1% and 14% Wednesday -- a typical reaction as portfolio managers realign their holdings to correlate with their benchmark index. Almost $1 trillion is indexed to the S&P 500.
According to Standard & Poor's analyst David Blitzer, deleted stocks typically fall about 11.7% between the announcement and effective date. But short-term losses are eliminated on the sixth day of trading and there is typically no long-term impact on stocks, he noted.
Standard & Poor's conducted a survey looking at 53 stocks that were deleted from the index between 1998 and 2002. Although 189 companies were actually removed during that time, the majority
136 were removed because of spinoffs or mergers. The remainder were taken out because of a failure to meet certain financial requirements and these were the companies that S&P focused on in its study.
"The stocks we remove will take a short-term hit based on the research we've done
but by the end of July everything should be back to the way it was," he said.
The fact that the issues being removed from the S&P 500 later this month are being deleted purely because they represent international companies, means the chances of any real underperformance in the future are slim.
Some issues that already ahve been deleted this year actually have seen their share prices rise.
, for example, was removed from the index on May 15, but the stock has since climbed 24%. In addition,
, which was taken out on June 26, has climbed 31% since that date, although the stock is sitting at just $1.43.
Meanwhile, several companies that have been added this year have seen disappointing results.
was added to the S&P 500 on May 15 but has since shed 9% while
has fallen 27% since it was added to the index on Jan. 30.
Other companies that have fallen after being added to the index this year include:
, which has actually been plunged 68% since it was added to the index in late January.
Blitzer said companies going into the index typically rise about 6% and 10% between the announcement and implementation but said most of that is given up in the next few weeks.
Goldman Sachs analyst Sandy Rattray agreed. In a study last year, he concluded that while the S&P tends to add stocks that have done very well recently, the performance of stocks after they have been added to the S&P 500 tends to be "more mixed."
Indeed, throughout the 1990s, stocks actually underperformed
relative to their peers three months after they were added to the S&P 500, and the results after 12 months aren't much better.
Still, Will McClatchy, president of Indexfunds.com, said stocks could have moved higher before the change was actually implemented and he noted that the impact of the initial trading bump shouldn't be discounted.
"Whenever you get a short term shot in the arm, if you reinvest that, it becomes a good deal of money over the long term, so I would take that seriously," he said.
Of the seven stocks being added, four have advanced this year while three have declined.
SunGard Data Systems
have all traded down while
United Parcel Service
Of the stocks taken out of the index, five have advanced this year while two have fallen.
have traded down while
Royal Dutch Petroleum
are higher for the year.