Continue reading ETF Stocks: Can you beat SPY? How to benchmark your performance

ETF Stocks: Can you beat SPY? How to benchmark your performance originally appeared on BloggingStocks on Fri, 13 Feb 2009 16:40:00 EST. Please see our terms for use of feeds.

If the number of large capitalization stocks is dropping due to a falling stock market, what can be done? Change the definition of "large cap." That is exactly what S&P is doing.

According to MarketWatch, "For large-cap stocks, reflected by the S&P 500, the value was cut to $3 billion from $4 billion. The S&P set the $4 billion mark on September 25." That makes for two revisions in three months. If the market keeps falling, perhaps that number could drop to $2 billion.

Why move the goal posts? Perhaps because some S&P indexes are based on the definition of large cap. Perhaps it makes people who invest in large cap stocks feel better.

Changing the definition may actually hurt some investors. There are still plenty of companies that have market caps above $4 billion or even $5 billion. There is a sense that the stocks in these firms are "safer" than other equities. A company that has been dragged below the $3 billion threshold may be a company with a stock that has dropped faster than the market in general or it may be a company that has a falling cash balance. A firm with $1 billion of cash on its balance sheet is more likely to have a market cap of over $3 billion than a company that has $200 million. Being a large cap stock actually means something, even if it is only by having balance sheet that is likely to be healthier than many others.

The S&P action will probably confuse some investors in an already confusing market. What is a large cap stock? Whatever S&P says it is.

Douglas A. McIntyre is an editor at 24/7 Wall St.

What is a large cap stock? S&P changes the guidelines originally appeared on BloggingStocks on Mon, 22 Dec 2008 12:29:00 EST. Please see our terms for use of feeds.