Ok, when indexes break (change) their rules they start setting investors up for serious disappointment and confusion down the road. S&P Dow Jones Indices has announced a revised treatment of Google Inc. (NASDAQ: GOOG) for its Class A and Class C shares in the S&P 500 and S&P 100, as well as related changes to methodology for the similar index. While this may take until late 2015 to occur, this is a handy change that could come with many ramifications ahead for index investors.

Google is establishing a new class of capital stock and is paying a dividend of one share of this new class of capital stock for each outstanding share of Class A and Class B common stock. Both Google Class A and Google Class C will be included in the S&P 500 and S&P 100 and there will not be a switch from Class A to Class C on June 20th as previously announced in a press release dated February 3, 2014.

What this likely tells you is that S&P believes Google shares will continue to rise, and it does not want to change the makeup of the index just because Larry and Sergey are taking control of their company even more. This will also keep Google’s weighting from being watered down – and that is significant. S&P said,

“The stock price is based on one class, usually the most liquid class, and the share count is based on the total shares outstanding. Under the new methodology, all eligible trading lines for a company that meet certain liquidity and materiality thresholds will be included in the index.”

Where S&P is changing the game is by admitting that multiple share classes are becoming more common among US corporations. It says that this is especially in the technology sector. What is sad is that if S&P is making this sort of change then it is indirectly endorsing multiple share classes – something that is great for CEOs who run the company, but it can be bad for Joe Public buying their stock. S&P said,

“Were the trend ignored, some indices would have difficulty properly representing major market segments while providing sufficient liquidity to accommodate trading and necessary index adjustments.  The use of multiple share classes is expected to enhance liquidity once the transition is completed. However, turnover may be caused by adjustments to current index constituents which have multiple share classes.”

Most of these S&P index measurements are indicated to represent free float adjusted percentages, as noted above. By including all of the classes now, there are going to still be the same 500 stocks. However, there will be 501 listings inside the S&P 500 Index. S&P telegraphed that this change is going to take quite some time (late 2015) to reflect. It went on to say,

“The change to multiple share classes will require revisions to various index methodological guidelines and rules covering liquidity, IWF’s, calculation of total and float adjusted market cap and other factors. Therefore, changes to share counts and share classes of stocks currently in the indices will not be done until September 2015, approximately 18 months from now.”

The S&P Dow Jones US Index Committee said that it acknowledges the comments received from index fund managers and investors. It seems unexpected that they would respond to the 24/7 Wall St. comment but we would love for them to – YOU ARE CHANGING INDEX HISTORY AGAIN, HOPING IT ALTERS THE PERFORMANCE TO THE UPSIDE!!!

So, here is the real issue at hand. If they are doing this for Google, why not for other big stocks in the S&P 500 and related indexes based upon adjusted floats and multiple share classes. In fact, get ready for that. This is not the first time that the S&P 500 Index made a change in its methodology – and it will not be the last.

If you take the cynical side of it, S&P’s researchers have almost certainly determined that by keeping the multiple classes of the stocks they deem as “good companies” then they are doing it to juice up the index performance.

If you find this a bit too cynical, consider this – Google’s market cap is $403 billion, just about $3 billion shy of Exxon Mobil Corp. (NYSE: XOM). It just so happens to be that Exxon Mobil is the second largest market cap in America, and the second largest S&P 500 stock.

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