Changes for the S&P 500 Index

By Jennifer Yousfi
Managing Editor

Standard & Poor's announced two changes to its popular S&P 500 Index, used by many investors to track the performance of the U.S. markets.

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Altria Group Inc. (MO) is divesting its tobacco subsidiary and the resulting firm, Philip Morris International Inc., will replace electronics retailer Circuit City Stores Inc. (CC) in the index after the close of trading on March 28. Altria Group will remain in the index.

HCP Inc. (HCP) will replace Commerce Bancorp Inc. (CBH), which is being purchased by Canada-based Toronto-Dominion Bank (TD), after the close of trading on March 31. HCP is a real estate investment trust (REIT) that focuses on investing in healthcare industry related properties.

The S&P 500 is the definitive measurement for the large-cap U.S. market. It is a market valued weighted index, meaning the representative companies have a weighted value in the index with larger companies having a bigger impact on index's movement.

A team of economists and analysts make up the S&P 500 Index Committee, which selects the constituent companies. Decisions for inclusion are based on a variety of criteria including market capitalization, sector, and liquidity.

Shares of stocks added to the S&P 500 Index tend to get a price boost due to the popularity of index investing. Mutual funds and exchange-traded funds (ETFs) that track the S&P 500 Index will need to purchase shares of the new additions in order to continue to match their chosen benchmark.

For the same reason, shares of companies dropped from the index tend to suffer a subsequent price decline as index funds sell those positions.

Such index-based funds are popular because they often have low expense ratios and allow an investor to mirror the S&P 500 index without the hassle and expense associated with investing in 500 individual stocks.

One of the oldest and most popular S&P 500 Index funds is the Vanguard 500 Index Fund (VFINX).

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