How are FTSE100 constituent companies chosen?

aroominyork

Can someone please explain or direct me to an explanation of how the FTSE100 constituent companies are chosen? I believe that any rising to 90th or above are automatically added and those falling below 100th deleted, but it's the process/algorithm for those in between which I am looking for. Thanks.

Username999

I thought it was: Every quarter the top 100 companies by Market Cap out of the FTSE350 (the combined FTSE100 & FTSE250) become the FTSE100 and the next 250 companies become the FTSE250.

bowlhead99

aroominyork said:

I believe that any rising to 90th or above are automatically added and those falling below 100th deleted

Username999 said:

I thought it was: Every quarter the top 100 companies by Market Cap out of the FTSE350 (the combined FTSE100 & FTSE250) become the FTSE100 and the next 250 companies become the FTSE250.

Not quite, as having 'top 100' be an exact cut-off could produce a lot of movement and reshuffling if valuations were tightly stacked at that market cap range. 

FTSE100 is an index of 100 large companies weighted by free float market capitalisation subject to liquidity screening rules and other qualifying criteria that you can get from the FTSERussell / GEIS website.

To avoid too much churn between those that occupy the 20 positions towards the bottom of the 100 and the top of the next 250, they do not literally cut off at position 100 and admit everyone who might get a fractionally better market cap on the last day of a review period while kicking out the ones that fell below. 

Instead, it has long been agreed that if you make it into the top 90 at close of business on the cut-off day (which was yesterday for Q3) you should automatically qualify for inclusion and move into the index, taking the place of the company which was previously in the FTSE100 index with the lowest weighting which would be relegated. The index would then be rebalanced to take account of everyone's free float market cap.  Likewise if you drop to a position where 110 companies have greater weighting in the all-share, you would get automatically relegated and be replaced by the company that had the highest weighting in the 250.   

So if you were a FTSE 100 company and found yourself below 10th in the FTSE 250 (the sort of space occupied by HICL Infrastructure or Tate & Lyle - market cap about £3.1-3.2bn yesterday) you would get kicked out. While if you were not in the FTSE100 but had more market cap than M&G or Homeserve (about £4.3bn yesterday) you would get let in.   As the difference between those positions is 20 places of the All-Share and currently represents a spread of about 30% on the market cap, you don't get tens of companies scrabbling for a place in the reshuffle each time. 

This quarter it was relatively straightforward as ITV has dropped to about 140th place so should definitely leave, and one company B&M made it to 80-somethingth and should definitely join, so the two companies just move in opposite directions out of the index and into the index.  There are others which made it into the 91st-100th range such as Pershing Square and Direct Line, while others such as DS Smith and British Land fell below position 100 but not to 110th; those companies will not get admitted / relegated as the index providers don't want to effectively have 20 companies all on the borderline jumping in and out every quarter, for the sake of stability and comparability from period to period.

Likewise for the FTSE 250 there is another 'spread' of 10% of the number of companies to beat for automatic inclusion or exclusion. To move from FTSE Small Cap to 250 you would have to be position 225 of the 250 (325 of the 350) while to automatically lose your place from the 250 (and 350) you would need to fall to 275 (375).

The FTSE 100, 250, and Small Cap require you to be on the main market, so ASOS which sits in AIM is not included in any of those even though it would be about position 80 with £5bn of market cap, likewise Boohoo would be about position 100 with £3.8bn,while Fevertree and GB Group are solidly FTSE250 size, etc.