Standard & Poor’s is dropping the seven non-U.S. companies currently in the benchmark S&P 500 index, including five Canadian firms. S&P is replacing them with seven U.S. companies, effective after the close of trading on July 19.

The Canadian firms to be dropped are: Nortel Networks; Barrick Gold Corp.; Placer Dome Inc.; Inco Ltd.; and Alcan Inc. Also being replaced are two Dutch firms: Unilever NV and Royal Dutch Petroleum.

Taking their places are the U.S. firms United Parcel Service, Goldman Sachs, Prudential Financial, eBay Inc., Principal Financial Group Electronic Arts and SunGard Data Systems.

“We project the selling pressure from index-linked assets for each of the five Canadian companies being deleted from the S&P 500,” says S&P. “All five deletes should see about 10% of their shares outstanding change hands, and days to trade should be less than 10 days.”

S&P says its research shows companies with larger market capitalization and higher share price have less price impact from index deletion, and that there is no long-term price impact of deletions.

The firm is making the change to put all S&P 500 members in compliance with S&P’s current selection criteria, which requires index members to be U.S. companies. The seven non-U.S. companies entered the index before the residency requirement was in place. All of the non-U.S. companies were also double-counted in the S&P Global 1200, and their elimination from the S&P 500 resolves this issue.

“This change makes the S&P 500 a better reflection of the large cap segment of the U.S. equities market and enhances the role of the S&P 500 as the key U.S. component of our global S&P index family,” said David Blitzer, chairman of the S&P Index Committee in a news release.

“Increasingly, users of the S&P 500 have told us that the inclusion of non-U.S. companies in the index makes the index more difficult to use for investment and risk control purposes. The change will mean that index funds and exchange-traded funds can expect lower operating and transaction expenses and less tracking error. We also believe that removing the non-U.S. companies will make the S&P 500 a more useful benchmark for tracking large-cap U.S. equity market performance,” said Blitzer.