As expected, Standard and Poor's announced today that Fannie Mae (FNM) and Freddie Mac (FRE) would be removed from the S&P 500 effective September 10th after the close. In their place, Salesforce.com (CRM) and Fastenal (FAST) will be added after the close on September 12th. Besides the fact that the additions will not take place until two days after the two stocks being removed will be taken out (Will it be the S&P 498 for two days?), there are other inconsistencies with the reasoning surrounding the removals.
In its press release, Standard and Poor's said that both FNM and FRE were being removed because they no longer fulfilled the $5 billion market cap requirement for inclusion in the index. With market caps of $1.04 billion for FNM and $0.57 billion for FRE, that's all well and good. However, there are currently three other stocks in the S&P 500 that have lower market caps than FNM. They are CIEN ($1.05 bln), DDS ($1.00 bln), and MTG ($0.93 bln). Why are they still in the index? Is S&P expecting them to go up 500% in the coming days? In fact, if S&P were to strictly enforce its $5 billion threshold for inclusion in the S&P 500, there would be 119 companies that are currently in the index that would have to be booted -- making it the S&P 381.
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