What Exactly is the S&P 500®?
If you pay any attention to investing, even just to pick funds in your 401(k), you have likely heard of the S&P 500. And, you may even know a few key things about it such as:
- “S&P” stands for Standard and Poor’s which is a US-based financial services company;
- The “500” represents the 500 largest US companies and is often referred to as “the market”; and
- On August 29, 2018, the index closed at a record high.
But, you may not know:
- How it is determined which companies are the largest;
- If the addition or deletion of stocks is made by a computer or actual people; or
- Why it matters to you what stocks are included in the 500.
Given that the value of the various Vanguard S&P 500 mutual funds and ETFs alone was $433.7 billion as of July 31, 2018 (and that doesn’t account for similar funds at Schwab, Fidelity, Blackrock and a host of other companies), we should all understand a bit more about this key investment index. Below are a few facts to improve your knowledge
The index was launched in 1957, and it did, in fact, include 500 companies. Today, the index is still comprised of 500 companies, but there are actually more than 500 different stocks because a few of the companies have two classes of stock. An example of this is Google’s parent company, Alphabet, which has two different stock symbols, GOOG (represents the class of shares with voting rights) and GOOGL (represents the class of shares without voting rights).
To be considered as a candidate for the index, the entity must be a US company with a market capitalization (“market cap”) of at least $6.1 billion (as of today – this changes from time to time), although most of the companies currently in the index are valued at much more. (In addition, the companies must meet other criteria to be considered such as financial viability and a minimum number of shares traded over the preceding 6 months.)
The companies with the largest market cap (think Apple, Microsoft, Amazon, and Facebook) are more heavily weighted in the index.
The stocks in the S&P 500 represent approximately 80% of the total value of the entire US stock market. As a result, it is considered a good barometer for the overall health of the US stock market. This explains why the index is often referred to simply as “the market.”
As shown in the above pie chart, the companies are categorized among 11 sectors of the economy. As of August 31, 2018, 26.5% of the index is weighted to information technology stocks. In comparison, at the end of 2014, the weighting to technology was approximately 19.4%.
Note: If all of your money is invested in index mutual funds that closely track the S&P 500, you may not be as diversified as you think (even if you own index mutual funds from different companies). Consider if you are comfortable that over 26% of your money is invested in one sector of the economy.
There are still actual people (the U.S. Index Committee) at Standard & Poor’s who decide what companies are in the index! Of course, the companies must first meet certain criteria mentioned in Fact #2 above.
Changes can be made at any time and are generally in response to market developments and corporate actions, and there are specific guidelines for deleting a company. As of August 28, 2018, there have been 14 companies removed (and, as a result, 14 replacement companies added) mostly due to company acquisitions.
We can’t actually invest directly in the S&P 500 Index. Instead, we invest in products such as mutual funds and exchange trade funds established by financial services companies to mirror the index as closely as possible (but they are not an exact replica). As evidence of this, the Vanguard S&P 500 fund actually has 509 holdings, the Fidelity 500 Index fund has 507, and the Schwab S&P 500 Index fund has 505.