When the S&P floats, will it sink your portfolio?
A new model for calculating index weightings will trigger selling in certain stocks.
By Ellen Florian Kratz

(FORTUNE Magazine) – Here's something your horoscope probably didn't tell you this month: Expect a touch of March madness in the market around the 18th. That's the day a number of Standard & Poor's stock indexes, including the widely followed S&P 500, take the first step toward a new free-float method of calculating company weightings.

Right now a company's weight in an S&P index is determined by the total number of shares outstanding. With free float--already the standard used by index rivals such as Russell--only shares that are actually available to the public are counted. Eliminating large blocks of unavailable stock--that is, shares held for control more than to trade--should make funds less expensive to run, says David Blitzer, chairman of the S&P index committee. How so? When fund managers build indexes to reflect the full market weight of companies that have stock off-limits to the public (huge chunks of Wal-Mart, for example, are held by family members), demand can outstrip supply, forcing artificially high prices.

While change is good, it can also be a little chaotic. "We expect quite a bit of volatility around this event," says Stacey Ternowchek, who heads analytical services for Thomson Financial. Nearly 80% of the companies in the S&P 500 float almost 100% of their stock to the public. Companies that don't should expect some selloff. But it won't happen all at once. March 18 marks a shift to a half-float calculation. On Sept. 16 the indexes will make the final transition.

Is it possible to make a quick buck on the switch? It's doubtful you can outmaneuver the trading pros. But if you like Wal-Mart anyway, say, it could be your chance to get the stock at a bit of a discount. And investors in for the long haul can take comfort in the fact that their index fund manager should have an easier time handling their money. -- Ellen Florian Kratz

The S&P 500 hit list

These five firms will see the largest decreases in index weighting.

 *Based on amount of stock held in S&P 500 index funds.