interesting ... from lee's board ...
Imminent S&P Float Transition To Affect Most ETFs
By ETFzone Staff
Standard & Poor's will kick off its transition to float adjustment for major US indexes on September 28. What may surprise ETF investors is the extent to which all US equity ETFs, and not just those based on S&P indexes, will be affected. One-time extra trading and impact costs for S&P-based ETFs will be will be better known on the 28th. Perhaps more importantly, it will be possible to gauge the extent of any potential sell-off of ETFs containing many companies with low float.
Float is the amount of an individual company's stock held by outside investors, as opposed to shares held tightly by insiders or in cross-ownership with another company. Float is often thought of as the supply of stock available for sale to the investing public. S&P has traditionally weighted indexes on total shares outstanding (float and tightly held), but is following other index providers to float-based weighting. Only float shares are thought to be part of the investable universe, and reviews of index returns show that float-based indexes perform better over time.
Since S&P indexes contain companies found in many other indexes and ETFs that follow them, nearly every ETF investor will be affected negatively in some fashion. Shares of a company with lower than average float will have to be sold off by ETFs tracking an S&P index containing the company. This will exert downward price pressure on that company's shares and on any ETF holding them. The opposite is true of high float companies. Their shares will be bid up, as ETFs tracking an S&P index containing them will call for greater representation. Neither scenario is desirable, since they entail transaction costs and they force investors to "buy high and sell low". At least in the case of high float, existing holdings of a company's stock will rise in value as buying forces prices of newly acquired shares up.
Technology and small-cap ETFs are likely to be hit hard because they are relatively recent creations and their founders typically retain large holdings, which reduces float. Large cap indexes of old-line industrial companies with little remaining inside ownership and as a result high float are less likely to suffer damage. An obvious likely loser is the technology-heavy Nasdaq-100 Trust (AMEX:QQQ), while the industrials-centered DIAMONDs (AMEXIA) is better positioned for the shock.
S&P is gradually weaning investors off traditional weighting with the following transition schedule:
* September 28: announcement of the percentage of float shares of every company found in its indexes
* October 15: publishing of three versions of every index: the existing index, a half float-adjusted index, and a full float-adjusted index.
* March 18, 2005: Official shift to half float-adjusted indexes.
* September 16, 2005: Official shift to full float-adjusted indexes.
The company clearly hopes that spacing out the transition will dampen additional costs created by arbitrageurs who may try to snap up high-float companies or sell short low-float companies in anticipation of pricing pressure in either direction. Arbitrageurs normally zero in on one stock for a short time period, and this 18-month transition would force them to make multiple plays on hundreds of stocks and would subject themselves to the vagaries of the market over an extended time.
09/15/2004
