- The S&P 500 is a broad stock market index made up of the 500 largest U.S. public companies.
- The diversity and scope of the businesses it pursues make the S&P a proxy for the entire stock market.
- You cannot invest in the S&P 500 yourself, but you can buy an index fund that duplicates its equities and performance.
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People often say ‘The stock market is up’, or ‘The market is down’. But the stock market is an amorphous affair involving thousands of stocks and dozens of stock exchanges. What they actually mean is a particular stock market index, or a group of listed companies, is up or down.
And if they are in the US, chances are the index is the Standard & Poor’s 500 or S&P 500.
Named after the number of companies on its list, the S&P 500 is a broad-based index covering the sectors of economic sectors such as information technology, healthcare and consumer discretion, as well as large enterprises in the financial, energy, industrial and sustainable consumer sectors. “says Solomon Tadesse, who heads quantitative research in North America at Société Générale.
“As such, the S&P 500 is a good chairman of the US stock market and, by implication, the economy and its short-term trends.”
Understanding the S&P 500 can be important for investors. Here’s all you need to know about this influential index.
What is the S&P 500?
The S&P 500, developed by Standard & Poor’s (now S&P Global), was launched in 1957. But its status as a proxy for the U.S. stock market was captured in 1968, when the S&P 500 became one of the indicators used by the Conference Board, the business membership and research organization, to predict economic trends.
This is called a weighted index, which means that companies with a higher market capitalization (the total value of all their shares) have more influence in the calculations, so that the total index better matches the broader market.
The relative level of the index – or the combined value of the shares in it – is expressed in points. In January 2021, it stood at 3,750. So if the S&P 500 rises by, say, 10% during 2021, that means a total index gain of 375 points.
What does the S&P 500 consist of?
One of the reasons why the S&P 500 is so widely cited is its composition: the 500 largest public companies in the US (although it actually contains 505 shares because some companies issue more than one class of shares). They are organized into 11 industrial sectors.
Individual companies can turn in and out. The S&P Global’s US Index Committee examines and rebalances the grid at least quarterly, although this could happen at any time in an effort to ensure that the index provides a representative reflection of the US stock market, according to an S&P. Global blog.
For a business to qualify for the index, it must meet the following criteria:
- Be based in the US (though it may have overseas operations)
- Hold a market capitalization of at least $ 9.8 billion
- Be very liquid, with at least 10% of its shares in the public market
- Be positive in the past quarter and in the four previous quarters.
What companies are there in the S&P 500?
The S&P 500 is full of well-known names, many of which are blue-chip companies with a strong track record of financial performance. As of December 2020, the 10 largest companies (according to market capitalization) in the S&P 500 include the following:
- Apple Inc. (AAPL)
- Microsoft (MSFT)
- Amazon Inc. (AMZN)
- Alphabet Inc. Class A Shares (GOOGL)
- Alphabet Inc. Class C Shares (GOOG)
- Facebook Inc. (FB)
- Tesla (TSLA)
- Berkshire Hathaway (BRK.B)
- Visa (F)
- Johnson & Johnson (JNJ)
What is the average return for the S&P 500?
Over the past ten years, the S&P has achieved 500 annual returns of 11.18%. In 2020, it achieved a return of 15.15%.
Because the companies within the index are so diverse and account for about 80% of total U.S. equities, these performance figures are generally seen as synonymous with the performance of the U.S. stock market.
Restrictions of the S&P 500
Although the S&P 500 is very representative, it is not perfect.
The S&P 500 is a weighted index, which means that companies with a higher market capitalization have more influence on the calculations. As a result, the index could “give excessive weight to the largest companies,” warns Leyla Z. Morgillo, a certified financial planner at Madison Financial Planning Group. ‘These weights can then skew the performance of the index, which can lead to a handful of stocks driving the overall index performance. You will not be able to see it just by looking at the overall performance of the S&P 500, so it can sometimes be misleading. ‘
Example: just two high-tech companies, Apple and Microsoft, together account for more than 11% of the benchmark. “This could create some discrepancies, as other relatively smaller relative companies could get lost in the sauce,” says Dan Veru, chief investment officer of Palisade Capital Management.
In an increasingly globalized economy and stock market, the S&P 500 also includes only US businesses. This means that large (and sometimes market-moving) foreign equities, such as the Chinese Alibaba Group or the German BioNTech SE, cannot affect its performance, making it less useful as an indicator of economic trends.
Other significant stock indices
Despite the prominence of S&P in the 500s, investors are also watching other indices. Among the participants:
- Dow Jones Industrial Average: One of the oldest indices, the Dow follows 30 leading U.S. companies. Of course, it’s much less than the S&P 500 – too little, some feel the financial benefits. The weighting system, which is based on the share price instead of the total market capitalization, can also unfairly penalize a company with a share split.
- Russell Indices: the Russell 3000 ranks 3000 U.S. companies, significantly more than the S&P 500. So do two other indices derived from the Russell 3000: the large capitalization Russell 1000 and the small capitalization Russell 2000. Many investment fund managers prefer the Russell 3000 and its smaller sisters, although the latter may be more volatile than the S&P 500.
- The Wilshire 5000: This index is made up of approximately 3,800 stocks (despite its name), which ranks as the broadest stock market index – virtually all listed companies in the US. Although obviously larger than the S&P 500, and therefore probably more representative, the Wiltshire also ignores the overseas markets.
- The Nasdaq 100: This growth stock-oriented index contains 100 of the largest local and international non-financial companies listed on the Nasdaq Stock Exchange. The index is attractive because of its emphasis on the technology sector, arguably the most influential, fastest-growing industry in the U.S. economy. But its bandwidth is even narrower than the S&P 500s, and it could put investors at risk if a downturn in the sector is followed.
How to invest in the S&P 500
You can not invest directly in the S&P 500 – it’s just a list, not a stock itself. But a variety of exchange-traded funds and ETFs (exchange-traded funds) buy bonds that follow the S&P 500, or a particular group of companies in it, such as high-dividend-paying companies or more growth-based companies.
All the leading brokerage and financial services companies offer S&P 500 index funds: companies such as Charles Schwab, Fidelity and Vanguard. So do most online trading platforms and programs, such as Robinhood and Stash.
S&P 500 index funds are also popular with robo-advisors such as Wealthfront and Betterment, which use computer algorithms to invest and monitor investor portfolios.
The financial collection
The S&P 500 has been a major watch for the performance of the stock market for more than half a century. As it represents the largest listed companies in the United States, its performance is seen as a snapshot of the US business world, and in the expansion of the US economy.
This index does have some shortcomings. Its weight on market capitalization may favor some companies, or sectors, over others; the bandwidth does not always reflect the entire local stock market; and it excludes companies not established in the US.
Yet the returns on individual stocks, mutual funds and other assets are all compared to the S&P 500. It can therefore also be a great tool for investors – to guide their individual investment choices and get an idea of how their choices are performing. , and even to duplicate via S&P 500 index funds.