own the stock, volume hit 132 million shares, representing $22 billion of
Yahoo! stock traded.
This story is repeated with virtually every stock added to the index,
although the average size of the gain is considerably less than Yahoo!’s.
Standard & Poor’s published a study in September 2000 that had deter-
mined how adding a stock to an S&P index influenced the price. This
study noted that from the announcement date to the effective date of ad-
mission in the S&P 500 Index, shares rose by an average of 8.49 percent.^16
During the next 10 days following their entrance, these stocks fell by an
average of 3.23 percent, or about one-third of the preentry gain. Yet one
year after the announcement, these postentry losses were wiped out,
and the average gain of new entrants was 8.98 percent. All these per-
centages were corrected for movements in the overall market. A more re-
cent study has shown that although the preentry gain has fallen in recent
years, the price of stocks admitted to the S&P 500 still has jumped over 4
percent in response to the announcement.^17FUNDAMENTALLY WEIGHTED VERSUS CAPITALIZATION-WEIGHTED
INDEXATION
Despite the overpricing of new entrants into the S&P 500 Index, virtually
all indexes that have a significant investment following, such as those
created by Standard & Poor’s, the Russell Investment Group, or Wilshire
Associates, are capitalization weighted. That means that each firm in the
index is weighted by the market value, or the current price times the num-
ber of shares outstanding. More recently, most of these indexes adjust
the quantity of shares by subtracting insider holdings, which include large
positions held by insiders and governments from total shares outstand-
ing. Government holdings can be especially large in the emerging
economies. The number of shares after this adjustment is called float-
adjusted shares, where “float” refers to the number of shares that are read-
ily available to buy.^18
Capitalization-weighted indexes have some very good properties.
First, as noted earlier in the chapter, these indexes represent the averageCHAPTER 20 Fund Performance, Indexing, and Beating the Market 353
(^16) Roger J. Bos, Event Study: Quantifying the Effect of Being Added to an S&P Index, New York: McGraw-
Hill, Standard & Poor’s, September 2000.
(^17) See David Blitzer and Srikant Dash, “Index Effect Revisited,” Standard & Poor’s, September 20,
2004.
(^18) Practically there is no bright line between those shares “readily available” and those that are not.
Holdings by index funds may actually be less available than those of close family members.