Berkshire Hathaway to Replace Burlington Northern in S&P 500

Published on January 26, 2010

Standard & Poor’s has announced that Berkshire Hathaway will replace Burlington Northern Santa Fe in both the S&P 100 and S&P 500 indices on a date to be announced.  The S&P 500 is a broad based index that is perhaps the most widely followed market index in the United States.  The S&P 100 is a sub-set of the S&P 500 and is designed to measure the performance of large cap companies across multiple industry groups.

As predicted in early November shortly after the acquisition announcement, the 50-for-1 split of Berkshire’s Class B shares has facilitated this move by Standard & Poor’s.  Although a great deal of speculative activity appears to have taken place in the B shares over the past week since the split, volume is up significantly and is likely to remain at levels that meet the criteria for index inclusion.

While the announcement today has caused a spike in Berkshire’s share price in after hours trading, as pointed out in the November article, nothing about the intrinsic value of Berkshire is changing either due to the stock split or inclusion in a market index.  However, it is definitely true that index funds will have to purchase Berkshire shares in the near term.

Perhaps more importantly in the long run, legions of “closet indexers” will have to do the same.  “Closet indexers” are fund managers who are supposedly actively managing their funds but are actually emulating a broad market index such as the S&P 500 while making only marginal changes to portfolio composition.  This can reduce “career risk” by avoiding short term underperformance at the cost of rarely outperforming the market by enough of a margin to cover expenses.

The author owns shares of Berkshire Hathaway.

Berkshire Hathaway to Replace Burlington Northern in S&P 500