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Big Changes for the S&P 500

Standard & Poor's announced on July 9 that it would replace the seven non-U.S. companies currently in the S&P 500 with seven U.S. companies, effective after the close of trading on July 19.

United Parcel Service (UPS), Goldman Sachs (GS), Prudential Financial (PRU), eBay (EBAY), Principal Financial (PFG), and S&P MidCap 400 components Electronic Arts (ERTS) and SunGard (SDS) will replace Royal Dutch Petroleum (RD), Unilever (UN), Nortel (NT), Alcan (AL), Barrick Gold (ABX), Placer Dome (PDG), and Inco (N), in the S&P 500 Index.

Pier 1 Imports (PIR), an S&P Small Cap 600 component, and PETsMART (PETM) will replace Electronic Arts and SunGard Data Systems in the S&P MidCap 400 Index.

Watson Wyatt (WW) will replace Pier 1 in the S&P SmallCap 600 Index.

Goldman Sachs will replace Nortel Networks in the S&P 100 Index.

In a press release, S&P said the change puts all S&P 500 members in compliance with its current index selection criteria, which requires members to be U.S. companies. The seven non-U.S. companies (two European and five Canadian) entered the index, some as far back as sixty years ago, before the requirement was in place and before S& had established a series of global indexes. S&P said the two European companies continue as members of the S&P Europe 350 and the five Canadian remain members of the S&P/TSX 60. All of these non-U.S. companies were double-counted in the S&P Global 1200 and their elimination from the S&P 500 resolves this issue.

"This change makes the S&P 500 a better reflection of the large cap segment of the U.S. equities market and enhances the role of the S&P 500 as the key U.S. component of our global S&P index family," said David M. Blitzer, Chairman of the S&P Index Committee. He added that S&P believes that "removing the non-U.S. companies will make the S&P 500 a more useful benchmark for tracking large-cap U.S. equity market performance."

The seven non-U.S. companies will be replaced by five newly eligible companies, all recent IPOs, and two companies to be promoted from the S&P MidCap 400. "We've been looking for the right opportunity to make this adjustment and this was the ideal time," said Blitzer. "The number of large replacement candidates means that the capitalization of the additions will nearly offset the deletions. Plus, this is a year of unusually low S&P 500 index turnover due to the low number of mergers and acquisitions in the large cap sector, so we are making the change at a time when the impact on index investors will be minimized."

According to S&P, research conducted by the company and other entities finds that membership in the S&P 500 does not have a lasting price impact. While there may be short-term reaction to the addition or deletion of a stock, studies cited by S&P show that these effects are temporary.

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