The maturity and prevalence of indexing on the equity markets have undeniably blurred the lines between active and passive management. Investors should be concerned because what appears to be a rules-based, transparent, low-cost strategy may involve hidden active choices that influence returns, risk and transaction costs.

The long-awaited closure of the acquisition of US Steel by Nippon Steel brings the active/passive differentiation back into focus. S&P will now remove US Steel from its flagship mid-cap index, the S&P 400. This removal leads to a vacancy in the S&P 400, and now the index provider must decide how (and when) to replace the acquired company.

The S&P 400, 500 and 600 are widely understood to be market-capitalization-weighted indexes, but the eligibility and rankings are based on quantitative AND qualitative criteria. Note that S&P Global states that their S&P 500 Index includes 500 leading companies, not the 500 largest.

Mathematically, selecting and weighting any number of a universe’s largest equities should be a relatively simple exercise; snap the prices of the eligible stocks, multiply by the number of shares outstanding (adjust for free float if you like) and rank the companies in order from the most valuable on down.

But here is where passivity doesn’t quite work; should the 901st most valuable stock be chosen to replace US Steel? What if that stock is already a constituent in the small-cap segment index, the S&P 600?

A promotion from small to mid now results in a vacancy in the S&P 600 and another selection and replacement dilemma is created. S&P could choose a stock whose market cap has fallen since the previous rebalance and select a name currently in the S&P 500. Perhaps S&P will choose to limit turnover in two of its indices and choose a company that isn’t currently in the 500 or 600. Will S&P then want to match the sector characteristics of US Steel with the replacement?

Once S&P decides — yes, there is a committee that gets to (ACTIVELY) choose — they are then tasked with the decision as to when this change will be implemented. S&P’s quarterly rebalance is scheduled for Friday June 20th, but with a United States market holiday on Thursday the 19th — is that enough time to get all the indexers ready and prepared to efficiently track the new index? Another major index provider, Russell, has the same challenge with US Steel, but their reconstitution is a week later on June 27th, which should be a very busy and liquid trading day. Would two competing index providers align for efficiency of the overall market? Month end is also an option, but the point is, how can we really call any of this passive?

Maybe it’s time for a new term. AcPa? Passactive? Pactive? Assive? Sorry, that last one was passive-aggressive (pun intended).

What do you think?

UPDATE: After the close on June 18, S&P announced that they selected APi Group (APG) to replace US Steel (X) at the close on Monday June 23, 2025. To qualify, APi Group must have satisfied S&P’s index committee and met their size and financial viability thresholds showcasing just how un-passive indexing can be.