Timing of S&P 500 Component Changes - Pre or Post Market?

When S&P 500 has a component change is the change made before market open or after the close. For example on March 3rd announement by S&P that UDR replacing GMCR after close of trading on Friday March 4th:

If I am using a list of changes to the S&P 500, can I assume all changes are made after the close of the trading day ?

Returns on the S&P 500, disseminated by S&P and other statistical firms are computed using closing prices. Institutional investors compare their own close to close returns between two dates to the S&P total return benchmark.

The standard phrase "UDR will replace GMCR after close of trading on Friday March 4th" simply means that in computing returns from March 3 to March 4th the price of GMCR on these two days is used. In computing S&P500 returns from March 4 to the next trading day March 7, 2016 the price of UDR will be used (and the GMCR price will not be used).

If you are a trader who is trying to match the S&P500 performance, what you do is up to you (in terms of buying/selling). S&P is just telling you how they will compute the day-to-day performance that you are trying to match. The list of stocks used will change in the manner described.

So the short answer to your question is yes: the substitution occurs at the close (never in the middle of the day or at the open; S&P does not publish. and no one would be interested in purchasing, total return figures computed at such strange times).

In general, it depends on your index provider. In the announcements like yours, it's stated explicitly. In practice, ETF Authorized Participants (AP's) just get the updated baskets from their provider between the close and next day open, so it doesn't really matter.

• What does it say in the index definition though?
– will
Jul 10 '16 at 22:36

For the S&P indices (and probably all other indices, but not 100% sure), the changes are made at the close. There are trading strategies people implement around this. My experience with this is some years back, so things may have changed.

Imagine your are the Vanguard S&P500 index tracker fund on the week that FB is getting added to the S&P 500. I don't recall the dollar value of the free floating stock for FB on the day of the add (December 20, 2013), but let's say that it was \$100B. Weights in the index are based on free floating shares - so Zuck's shares don't count. Given \$100B of free floating stock - the index tracking funds like Vanguard have about 12% of the SPX. This means that these funds need to hold 12% of the free floating shares of FB on the close on Dec 20, 2013.

In reality, they start buying some shares a few days in advance. In fact they are strongly motivated - especially on the last day - to buy shares in the open market so that they have about 50-60% of their required position before the close. Then - on the close they jam the order book with a huge market on close order which can sometimes cause the closing print to be 1-3% (I have even seen 10%) higher than the last print before the close. This is a big win for Vanguard because they are only required to replicate the closing prices - so they have, in fact, most likely gotten an average fill below the closing print with their buying and subsequent jamming on the close.

So what matters most here is the \$amount that the indexers need to buy because their motivation for this strategy is based on the \$ amount they can make! A second order concern is what is the expected difference in average daily trading volume - this matters too, but not to the same extent.

So, buy siders sometimes (at least some years back) used to like to piggy back on these trades that the indexers were doing. Typically, such a trade would be hedged with SPX and/or the comparable stock of another company in the same industry so that macro risk is mitigated. When we were doing it, this was an amazing strategy - I couldn't understand why it just kept working, but it did. I have to imagine market efficiency has caught up by now - or rules may have changed to make it harder.

Other things to note - getting added to the S&P500 is much less interesting if the add was an upgrade from the midcap S&P 400 - in that case midcap indexers need to sell their shares - I think they used to hold 7% of the shares, so the net amount to buy was only 5% instead of 12%. This could sometimes set up good shorting opportunities if the stock moved up too much on the announcement of the add.

The key to this strategy was execution and hedging it right.