Bending the Rules, Index-Style

Earlier in the month we highlighted how the credit crisis has been affecting the composition of the S&P 500, and how at times this month the index hasn't even had as many members as its name would suggest.  We also noted that given Standard and Poor's market cap criteria ($5 bln or more) for inclusion into the S&P 500, that several of the current members of the index would now not be eligible for inclusion into the index. 

Within S&P's discussion of the criteria for inclusion into the index, they also qualify their comments by saying that the requirements are for inclusion and not continued membership.  Therefore, a stock in the index is not automatically removed from the index if it temporarily fails to meet some of the necessary criteria.  That being said, we wonder how the addition of Floserve (FLS) into the index will be rationalized given its current market cap.  On Friday after the close, S&P announced that FLS would replace Washington Mutual (WM) effective October 1st.  However, as shown below, FLS  traded down over 7% Monday, putting its market cap at $4.75 bln, which is 5% below the $5 bln market cap threshold.  Provided the stock stays at current levels, S&P will be adding a stock to the index that from the outset doesn't even satisfy the requirements for inclusion into the index.