“I would guess the committee would likely not delete any names there,” said Colas. “Better to wait and see how the commodity recovery plays out.”
Along with the $8.2 billion threshold, S&P inclusion rules say liquidity measures must be sufficient, and the sum of total earnings over the past four quarters has to be positive. But there’s leeway. In most cases, the index’s regulations treat those levels as prerequisites for inclusion — not grounds for ejection.
“The addition criteria are for addition to an index, not for continued membership,” says the 41-page S&P U.S. Indices Methodology rule book. “As a result, an index constituent that appears to violate criteria for addition to that index is not deleted unless ongoing conditions warrant an index change.”
Human judgment is also part of the process. The committee aims to minimize turnover and also takes sector representation into account. Shifts in index composition are made as needed and “changes in response to corporate actions and market developments can be made at any time,” according to S&P Dow Jones Indices.
Eleven months into 2020, 15 companies have been booted from the S&P 500, including firms that have been acquired. That’s less than the number of companies that were replaced in each of the last two years, S&P Dow Jones Indices data compiled by Bloomberg show.
Of those that were dumped this year for reasons other than mergers and acquisitions, six were consumer discretionary stocks, including retailers such as Macy’s Inc., Nordstrom Inc. and Kohl’s Corp. Two were energy companies, one was a consumer staples firm, and another was a tech stock.
Most recently in October, industrial tech firm Vontier Corp. replaced Noble Energy Inc., which was acquired by Chevron Corp. E*Trade Financial Corp., which was purchased by Morgan Stanley, was replaced by Pool Corp., a distributor of swimming pool supplies. In September, the committee passed up an opportunity to add Tesla — sending its shares tumbling — and instead opted for online retailer Etsy Inc., chip-gear maker Teradyne Inc. and medical-technology firm Catalent Inc.
Christopher Grisanti, chief equity strategist at MAI Capital Management, doesn’t envy the index’s overseers, the “high priests of the S&P,” as he calls them.
“There’s certain market dislocations that would temporarily affect the qualifications of certain companies,” said Grisanti. “To kick them out because of temporary dislocations is probably not a wise thing. Having said that, I have sympathy for both sides of that argument, and I would not like to be a guy who has to do that.”
—With assistance from Claire Ballentine.
This article was provided by Bloomberg News.