The S&P 500 index is one of the most widely followed stock market indices in the world. Maintained by S&P Dow Jones Indices, the S&P 500 represents the stock performance of 500 large U.S. companies across diverse industries. With a total market capitalization of over $30 trillion, the S&P 500 covers about 80% of available U.S. market capitalization. In this article, we’ll take a closer look at how the index is constructed and why it has become so important for investors.
What Are the Criteria for inclusion S& P 500
To be included in the S&P 500, companies need to meet the following eligibility criteria:
- Be a U.S. company
- Have a market capitalization of at least $8.2 billionÂ
- Be highly liquid with robust trading volume
- Have adequate representation across all sectors
- Must have positive earnings over the most recent quarter
The S&P 500 is a float-adjusted market-cap weighted index. This means a company’s weighting in the index is proportional to its float-adjusted market capitalization, which is calculated by taking the total shares outstanding multiplied by the stock price, excluding closely-held shares.Â
S&P 500 Calculation
The value of the S&P 500 index is calculated by summing up the float-adjusted market caps of all 500 component stocks and then dividing the total by a proprietary index divisor. The divisor is adjusted whenever changes to the index composition occur, such as during quarterly rebalancing or when new companies are added. This helps maintain the continuity of the index over time.
S&P 500 Sector Breakdown
The 500 companies in the S&P 500 span 11 major sectors or Global Industry Classification Standard (GICS) sectors:
- Information Technology – 26.5%Â
- Health Care – 13.3%
- Financials – 11.1%Â
- Communication Services – 10.5%
- Consumer Discretionary – 10.3%
- Industrials – 8.1%
- Consumer Staples – 6.9%
- Energy – 4.3%
- Utilities – 2.8%
- Real Estate – 2.8%
- Materials – 2.6%
This sector composition provides broad exposure to the U.S. economy. The index committee strives to maintain sector balance so no single sector dominates the index.Â
How Are Companies Selected for the S&P 500?
Additions and deletions from the S&P 500 are made on an as-needed basis. The S&P Index Committee aims to minimize unnecessary turnover in index membership while ensuring new additions reflect the evolving U.S. equity market.Â
When considering additions, the Index Committee evaluates market cap, liquidity, domicile, public float, sector representation, financial viability, and length of time trading. Companies must have strong fundamentals with four consecutive quarters of positive earnings to qualify. Highly speculative companies are excluded.
Deletions occur due to corporate events like bankruptcies, mergers and acquisitions. The committee may also remove companies that no longer meet inclusion criteria.
Why the S&P 500 Matters for Investors
Here are some of the key reasons why the S&P 500 index is so widely followed:
- It represents a broad cross-section of leading U.S. companies and the overall health of corporate America.Â
- With over $11.2 trillion indexed or benchmarked to it, the S&P 500 is the basis for many passive funds and ETFs.
- The index is used as a benchmark to evaluate active investing strategies and manager skill.
- It serves as a barometer for the U.S. equity market and economy as a whole.
The S&P 500 vs. Other Major Indices
While the S&P 500 focuses strictly on large-cap U.S. stocks, here’s how it compares to other major market benchmarks:
- Dow Jones Industrial Average – tracks 30 prominent blue chip U.S. stocks.
- NASDAQ Composite – covers over 3,000 stocks on the NASDAQ exchange across all market caps.
- Russell 2000 – measures performance of 2,000 small-cap U.S. companies.
Overall, the S&P 500 stands out for its blend of size, liquidity and diverse sector makeup. It continues to be one of the most influential stock market barometers for investors and analysts.
Historic Performance of S&P 500
The S&P 500 has delivered substantial long-term returns since its launch in 1957. Through December 31, 2022, the index had an annualized return of around 10.5% over its lifetime. It hit an all-time high of 4,796 in early January 2022 before pulling back later in the year. The S&P 500’s strong historic gains highlight why it is regarded as a representation of the overall US stock market and makes it appealing to investors looking for broad equity exposure.
Record Highs
The S&P 500 has reached new record closing highs with regularity in recent years. Some of the key milestones include closing above 3,000 for the first time in July 2019, eclipsing 4,000 in April 2021, and surpassing 4,700 in August 2021. This upward trajectory reflects the substantial gains of US large-cap stocks coming off pandemic lows on the back of fiscal stimulus, low interest rates and strong corporate earnings growth. These new records demonstrate the bullish sentiment around US equities.
Investing Strategies
Many investors utilize S&P 500 index mutual funds and ETFs as core portfolio holdings to track the broader US equities market. These low-cost funds provide diversified exposure to S&P 500 stocks. Active managers also frequently use the S&P 500 as a benchmark to evaluate performance. Other trading strategies involve the use of S&P 500 futures and options to speculate on index direction or hedge portfolios. The prevalence of S&P 500 investing illustrates its importance as a barometer of the US stock market.
S&P 500 – Top 10 Holdings
As of September 2022, the top 10 holdings in the S&P 500 by weight were Apple (6.5%), Microsoft (5.7%), Amazon (2.5%), Tesla (1.9%), Alphabet A (1.7%), Alphabet C (1.7%), Berkshire Hathaway (1.5%), Johnson & Johnson (1.5%), UnitedHealth Group (1.3%) and NVIDIA (1.2%). These major technology and consumer companies have an outsized impact on index performance due to their large market capitalizations.
S&P 500 Rebalancing Schedule
The S&P 500 undergoes quarterly rebalancings to account for corporate actions and ensure continued representativeness. Component changes take effect after the close on the third Friday of March, June, September and December. Unscheduled deletions can occur due to bankruptcies, mergers and other events. Additions are made on an as-needed basis and must be announced at least one week in advance. This regular rebalancing methodology maintains the integrity of the index as an accurate benchmark.
Comparing the S&P 500 to Other Indices
Unlike the exclusively large-cap U.S. focus of the S&P 500, the MSCI World Index captures over 1,500 stocks across 23 developed market countries including the US, Canada, Western Europe, Japan, Australia and New Zealand. So while the S&P 500 serves as a proxy for the U.S. equity market, the MSCI World Index covers about 85% of the global investable market cap. Comparing the two illustrates the relatively narrower geographical diversification of the S&P 500.
S&P 500 & Financial Media
Daily movements and milestones of the S&P 500 are routinely reported in financial news outlets. The index often comes up in discussions around overall market sentiment and performance. Business news networks display the S&P 500 prominently along with other major indices. Market analysts closely watch the S&P 500 and make recommendations based on technical and fundamental signals. The ubiquitous media presence of the S&P 500 underscores its standing as a critical barometer of the stock market.
How to Invest in the S&P 500
Investors looking to gain exposure to the S&P 5oo can do so via either tracker funds or ETFs
S&P 500 Tracker Funds
Vanguard 500 Index Fund (VFIAX) – Admiral Shares: This is a mutual fund that has a very low expense ratio of 0.04%. It is one of the most popular S&P 500 funds among investors.
Fidelity 500 Index Fund (FXAIX): This is another popular mutual fund with an expense ratio of 0.015%. It is a good option for investors who are looking for a low-cost way to track the S&P 500.
Schwab S&P 500 Index Fund (SWPPX): This is a mutual fund with an expense ratio of 0.02%. It is a good option for investors who are looking for a low-cost and easy-to-use way to track the S&P 500.
iShares Core S&P 500 ETF (IVV): This is an exchange-traded fund (ETF) with an expense ratio of 0.03%. ETFs are traded on stock exchanges like stocks, and they offer the same low-cost way to track the S&P 500 as mutual funds.
SPDR S&P 500 ETF Trust (SPY): This is another popular ETF that tracks the S&P 500. It has an expense ratio of 0.09%
These are just a few of the many S&P 500 tracker funds that are available. When choosing a fund, it is important to consider factors such as the expense ratio, the minimum investment amount, and the liquidity of the fund.
S&P 500 ETFs
iShares Core S&P 500 ETF (IVV): This is an ETF with an expense ratio of 0.03%. It is the largest S&P 500 ETF by assets under management
SPDR S&P 500 ETF Trust (SPY): This is another popular ETF that tracks the S&P 500. It has an expense ratio of 0.09%
Vanguard 500 Index Fund ETF (VOO): This is an ETF from Vanguard with an expense ratio of 0.03%. It is a good option for investors who are looking for a low-cost and passively managed way to track the S&P 500.
Schwab S&P 500 ETF (SWPPX): This is an ETF from Schwab with an expense ratio of 0.02%. It is a good option for investors who are looking for a low-cost and easy-to-use way to track the S&P 500.
Invesco S&P 500 Equal Weight ETF (RSP): This is an ETF that tracks the S&P 500, but it weights each stock equally, regardless of its market capitalization. This means that smaller companies have a larger weight in the ETF than they would in the S&P 500. RSP has an expense ratio of 0.20%.
These are just a few of the many S&P 500 ETFs that are available. When choosing an ETF, it is important to consider factors such as the expense ratio, the minimum investment amount, and the liquidity of the ETF.
In short, the S&P 500 remains one of the most widely followed and influential stock market benchmarks. Its performance and composition offer invaluable insights for investors seeking to understand the overall health and direction of U.S. equities.
Brock Harrington is a distinguished figure in the world of finance, known for his exceptional expertise and deep insights into the complex landscape of financial markets and strategies. With a solid educational foundation and a career spanning decades, Brock has earned a well-deserved reputation as a finance guru in South Africa.
Brock’s journey into the realm of finance began with his relentless pursuit of knowledge. He earned his Bachelor of Commerce (BCom) degree, laying the groundwork for his illustrious career. His time as a student allowed him to develop a strong analytical mindset and a keen eye for spotting opportunities within the financial sector.
Building upon his early academic success, Brock Harrington went on to pursue a Master of Business Administration (MBA) degree. This advanced education not only broadened his horizons but also honed his skills in strategic financial planning, risk management, and investment analysis. Armed with these qualifications, he was well-prepared to navigate the intricacies of the financial world.
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