Question: Could you explain how the new S&P Index works?

A BuyandHolder

Answer:

Dear BuyandHolder,

A timely question as the configuration of the popular Standard & Poor 500 Stock Index has just undergone a slight makeover.

Here are the facts:

• In the past, the Index was weighted based on the market value of a stock.
  
  
• Recently the formula was changed and the Index is now being weighted based on the publicly available float. In other words, companies that have the most shares owned by public investors now have a greater influence on the S&P's value than those with many shares held by the founding family members.
  
  For example, a company like ExxonMobil now has greater weight than a company such as Wal-Mart which is largely owned by members of the extended Walton family.
  
  Wal-Mart has approximately 4.2 billion shares outstanding, with a market value of $217 billion. In the old S&P 500 Index, that made it the fifth largest company in terms of weighting. Under the new formula -- which means counting only those shares held by public investors, such as yourself, Wal-Mart has a float of $131 billion. Therefore, it has dropped from fifth place to 13th place.
  
  
• Of the 500 stocks in the Index, only 102 have been affected by the change.
  
  
• The Index's dividend yield has barely changed. On the day before the new formula, the yield was 1.78%. It's now about 1.79%.
  
  
• The Index's P/E (price/earnings) ratio has also barely changed. It was 16.2 times expected earnings for 2005. After the change, it moved slightly -- up to 16.3.

Who was affected?

The 10 stocks most affected, in descending order, were:

Wal-Mart
Microsoft
Oracle
Carnival
MetLife News Corp.
Coca-Cola
eBay
Qwest Communications
Freescale Semiconductor

Management of the Index

The Index is managed by the S&P Index Committee, "a team of S&P economists and index analysts, who meet on a regular basis." It is the responsibility of the Index Committee to make certain that the S&P 500 is a leading indicator of U.S. equities.

When companies in the Index shrink in size and are no longer large enough to qualify, they are cut from the Index. Other companies are added in their place.

Why the change?

Standard & Poor's told the investment community that it's making the change so the Index "reflects the actual market value of stock and reduces the cost of index investing."

The results?

The realignment has forced managers of S&P 500 Index funds to sell shares of Wal-Mart and buy those stocks that have a heavier weight. However, the change has very little impact on individual investors.

For Further Information:

Check out: www.standardandpoors.com

The site reports on all changes within the Index, including those due to mergers and reduced size.

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