S&P Rebalancing Means High Volume At Close; Citi Will Be Hot

NEW YORK (Dow Jones)--Just before Friday\'s close, fund managers benchmarked against the S&P 500 index are expected to shuffle around some $5.84 billion in shares ahead of the major index\'s quarterly rebalancing.

The changes come as Standard & Poor\'s undergoes its quarterly adjustment to its major indexes to better reflect the number of shares outstanding for each of its stocks. The rebalancing - to take effect after Friday\'s close - will also readjust investment weight factors, which account for how much of a company\'s stock is readily available to the market.

That means Friday\'s closing trade is likely to see a lot of volume. Sectors expected to see larger impacts include financials and consumer staples, which will likely see a lot of buying, and energy and health-care, which could see a good deal of selling. Among individual stocks, Citigroup Inc. (C) is expected to be particularly hot.

The target for all the fund managers is tonight\'s close, said Charles Behette, director in ITG???s U.S. portfolio trading group. If I want to be exactly like the index in a perfect world, I would buy or sell the exact number of shares I need proportionately for my portfolio right on the close.

A good deal of trading related to the rebalancing does occur ahead of Friday\'s final trades, too, even among investors not connected with funds or without any need to maintain certain benchmarks. These investors try to buy or short stocks ahead of the trades funds are expected to make at Friday\'s close.

The rebalancing is likely to result in a turnover of 0.62% on the S&P 500, according to ITG. About $909.2 million in consumer staples shares are expected to be bought, and $859.4 million in financials will be purchased as a result of the rebalancing, the firm estimates. ITG forecasts sales of $651.3 million in energy shares and $517.6 million in health-care stocks.

Citigroup is expected to see the most number of shares bought as a result of the rebalancing, while Yahoo Inc. (YHOO) is expected to see the most sold. For a $1 billion portfolio benchmarked against the S&P 500, ITG estimates 174,934 shares of Citigroup would need to be purchased, while 21,981 shares of Yahoo would need to be sold, according to ITG.

In recent trading, however, Citigroup shares were down 1.4%. Yahoo shares, meanwhile, slid 1.5%.

David Blitzer, chairman of the S&P 500, said the impact to Citigroup reflects not only the doubling of its shares outstanding due to the conversion of its preferred shares into common shares, but also that a large chunk of its shares are now unavailable to the market due to the government\'s stake. Its investment weight factor is being reduced from 100% to 57%.

If the investment weight factor went down to 50%, it would have offset the doubling of Citigroup\'s shares outstanding. But because it went down to 57%, there is a modest net buy, so the index funds will go out and buy additional shares, Blitzer said.

-By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [e-mail]

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