A Note on S&P's Revised Market Cap Definitions

| About: SPDR S&P (SPY)

Yesterday, S&P shared its thinking on what exactly constitutes a "small cap" (as well as a "mid cap" and a "large cap"), breaking it out as follows:

  • Large cap (S&P 500): >$4 billion (formerly >$3 billion)
  • Mid cap (S&P 400): $1 billion to $4.4 billion (formerly $850mm-$3.8bln)
  • Small cap (S&P 600): <$1.4 billion (foremerly $250mm-$1.2bln)

This is an interesting guideline that they have shared and gives us some guidance regarding future changes. Unlike the Russell indices, which are rebalanced annually, S&P engages in a continuous process that results in incremental changes all the time.

The S&P 500 currently has 41 names (8%) that are below the minimum. The S&P 400 currently has 62 names (15%) that are in excess of the $4.4 billion top-end. One has to wonder if the indices will be experiencing more turnover than usual or if they will address this gradually.

Here are the 10 largest names in the S&P 400:

  • Edwards LifeSciences (NYSE:EW)
  • Joy Global (JOYG) - promoted today
  • Cimarex Energy (NYSE:XEC)
  • Borg Warner (NYSE:BWA)
  • Chipotle Mexican (NYSE:CMG)
  • NY Community Bancorp (NYB)
  • Vertex Pharma (NASDAQ:VRTX)
  • Lubrizol (LZ)
  • Bucyrus (NASDAQ:BUCY) - going away due to merger
  • Atmel (NASDAQ:ATML)

We can do the same exercise for the S&P 600 and see that there are 14 names in the S&P 400 less than $1 billion. 102 (16%) of the names in the S&P 600 are greater than $1.4 billion.

Here are the largest 10 names in the S&P 600:

  • Cypress Semi (NASDAQ:CY) - promoted today
  • Oil States International (NYSE:OIS)
  • Varian Semiconductor (NASDAQ:VSEA)
  • Regeneron Pharma (NASDAQ:REGN)
  • Holly (HOC)
  • Cooper Companies (NYSE:COO)
  • Carbo Ceramics (NYSE:CRR)
  • World Fuel Services (NYSE:INT)
  • Amerigroup (AGP)
  • Stifel Financial (NYSE:SF)

There has been significant research over the years regarding additions and deletions to the S&P indices. Clearly, the best outcome for a stock is to be added to an index when it wasn't a component of any of the indices beforehand, but it can be a good trading opportunity to get "promoted", especially to the S&P 500.

With the new guidelines, it will be interesting to see if S&P moves quickly to get the indices in line. If so, there could be some trading opportunities, especially in the mid cap names. While I didn't share the names, it might make sense to avoid the smaller names in the S&P 500 and particularly in the S&P 600, where 33 names (5.5%) are smaller than $200mm and could be at risk of deletion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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