Friday, September 16, 2005

S&P 500 index completes move to free-float methodology.. index funds must sell some Wal-Mart stock to comply.

To put this as simply as possible, Standard & Poors announced last year that they were changing their weighting methodology for the S&P 500 index and that this change would occur in 2005.

The S&P 500 is a stock market index comprised of the stocks of five hundred of the largest and most significant public companies in the U.S. and is one of the most commonly used benchmarks for the overall U.S. stock market.

Wal-Mart is part of the S&P 500 and since the S&P 500 is a market capitalization (or “market cap”) weighted index, Wal-Mart (with its enormous market cap) makes up a significant portion of the index.

Since the Walton family owns approximately 39% of all of the stock of Wal-Mart, Standard & Poors considers this portion of Wal-Mart’s stock to be “not available to the public.” Therefore they want to adjust Wal-Mart’s weighting in the S&P 500 to reflect this.

There is approximately $1 trillion invested in index funds that track the S&P 500. Those index funds will need to make adjustments to their portfolio to reflect the new index methodology (i.e. the free-float methodology). Half of the adjustment occurred back on March 18th of this year. The second half of the adjustment is occurring today.

This means you should expect to see an enormous number of Wal-Mart shares change hands today. The trading volume today should easily be twice the normal volume.

The graphic below shows that the index re-weighting will be complete by today.

[Please note that on page 28 of the 2005 Annual Report, Wal-Mart suggests that they will be taking advantage of the index re-weighting to step into the market to buy shares under their current share buyback program. See the first comment on this post for that text.]


Blogger Bobby said...

"We consider several factors in determining when to make share repurchases, including among other things, our current cash needs, our cost of borrowing, and the market price of our stock. The increased authorization approved in September 2004, in part, contemplates possible repurchases of our shares that may become available for purchase as a result of the Standard & Poor's (S&P) Index float adjustment implemented in March and September of 2005."

page 28, Wal-Mart 2005 Annual Report

September 16, 2005 1:47 PM  

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