SP500 sector weights - how do they change?

Question

The weights of the nine S&P equity sector indexes vary over time. One can find measures of them in a number of different formats:

S&P 500 Sector SPDRs - historical sector weights

Here's an interesting way of looking at sector weights, and their relative performance. It's easy to do - just take the 9 sector SPDR ETFs, one for each sector, and divide each by the sum of all 9. The graph shows the history of this since 1999. This analysis leaves out dividends (which I know is not fair, since sectors like Utilities may have disproportionate dividends), but it gets the idea across.

Not bad, but perhaps not as accurate as one would like.

One sometimes see tables of this data such as:

S&P 500 Historical Sector Weightings

The column heading "3/09" in the above table raised some questions with us as we have begun studying the S&P sector indexes for possible inclusion in our portfolios and specific product development.

The questions came up:

• Do the weightings get driven purely by trading (as one sector rises relative to the others its percentage weight rises)?

• Does S&P reset the weighting of the sectors by some other method ("3/09" got us wondering about this)?

• Does some combination of both occur?

Dow Jones, for instance, resets the weights (and members) of its indexes. What does S&P do and if they do this what methodology do they use?

If S&P does reset the sector weights, can anyone refer us to an authoritative source of data for the historical weights and the dates of the resets? Perhaps it would merit addition to: What data sources are available online?

I've asked this question of S&P's Index Services group, but haven't received a timely reply. I thought it worthwhile to ask here. If I do hear back from them I post their answer.

Answer 1

S&P finally did respond to our query with a 100 page document. The part relevant to this question follow:

Select Sector Index Calculations

With the exception of the weighting constraints described above, each Select Sector Index is calculated using the same methodology utilized by S&P in calculating the S&P 500. In particular:

Each Select Sector Index is calculated using a base-weighted aggregate methodology; that means the level of the Select Sector Index reflects the total market value of all of its Component Stocks relative to a particular base period. Statisticians refer to this type of index, one with a set of combined variables (such as price and number of shares), as a composite index.

The total market value of a company is determined by multiplying the price of the stock by the number of common shares outstanding. An indexed number is used to represent the results of the aggregate market value calculation in order to make the value easier to work with and track over time.

The daily calculation of each Select Sector Index is computed by dividing the total market value of the companies in the Select Sector Index by a number called the “Index Divisor.” By itself, the Index Divisor is an arbitrary number. However, in the context of the calculation of the Select Sector Index, it is the only link to the original base period value of the Select Sector Index. The Index Divisor keeps the Select Sector Index comparable over time and adjustments to the Index Divisor ensure that there are no changes in the Select Sector Index level as a result of non-market forces (corporate actions, replacements of stocks in a Select Sector Index, weighting changes, etc.).

Four times a year on a Friday close to the end of each calendar quarter, the share totals of the companies in the S&P 500 are updated by S&P. This information is utilized to update the share totals of companies in each Select Sector Index. After the totals are updated, the Index Divisor is adjusted to compensate for the net change in the market value of the Select Sector Index.

Once a week the database containing the current common shares outstanding for the S&P 500 companies is compared by S&P against the shares outstanding used to actually calculate the S&P 500. Any difference of 5% or more is screened for review by S&P. If appropriate, a share change will be implemented by S&P after the close of trading on the following Wednesday. Preannounced corporate actions such as restructurings and recapitalizations can significantly change a company's shares outstanding. Any changes over 5% are reviewed by S&P and, when appropriate, an immediate adjustment is made to the number of shares outstanding used to calculate the Select Sector Index. Any adjustment made by S&P in shares outstanding will result in a corresponding adjustment to each affected Select Sector Index.

S&P handles corporate actions which may arise from time to time and which may have an impact on the calculation of the S&P 500 and, consequently, on the calculation of the Select Sector Index. Corporate actions such as a merger or acquisition, stock splits, spin- offs, etc., require adjustments in the Select Sector Index calculation. Index Divisor adjustments, calculated when necessary, are handled by S&P in its maintenance of the S&P 500. In the event a merger or acquisition changes the relative importance of a company's participation in two or more sectors in a major way, the Select Sector Index assignment of the stock may change. In any event, a new Index Divisor for affected Select Sector Indexes will be disseminated promptly by S&P.

If anyone wants the entire S&P document feel free to contact me by email.

Note this answer still does not provide a source for the data of when changes to the weightings (other than those by trading) occur.