The Standard & Poor's 500 or S&P 500 is an index that track the stocks of the 500 largest companies in the United States.
It is not the exact list of the top 500 largest companies in the US as there are other criteria to be included in the index, but it is a fairly good representation of the US economy.
The S&P 500 is considered as one of the best indexes to measure the health of the American economy and it includes more companies than some other American indexes such as the DJIA (Down Jones) which includes only 30. The Standard & Poor 500 covers approximately 80% of the U.S. stock market through its capitalization.
The collection of stocks that compose the S&P is designed to represent the overall composition of the U.S. economy. Its exact mix and weights are adjusted to reflect changes in the economy, and some stocks have been added and removed over time.
A bit of history of the S&P 500
The S&P 500 was introduced as a stock market index in 1957. The aim remains the same; to be the index of the 500 largest companies listed on the New York Stock Exchange (NYSE) and the NASDAQ. It has dethroned the Dow Jones Industrial Average as the most representative index of the U.S. stock market because it is composed of a greater number of companies and that its value takes into account the market capitalization of the companies included in the index, while the Dow puts a strong importance on the stock prices.
Since its introduction, the S&P 500 has had its ups and downs, reflecting the economic health of the United States. For example, the subprime crisis saw the index fall 57.7% between 2007 and 2009. However, by 2013, the S&P 500 has recovered all its losses and is in a all-time high in 2020, outpacing other major asset classes, such as bonds and commodities. To give some figures, the total market cap in September 2020 is of 27.87 trillion.
How the S&P 500 works
The S&P 500 tracks the market capitalization of the companies in its index. The market cap is calculated by multiplying the total value of the shares issued on the market by their price per share.
Moreover, larger companies will have a bigger impact on the index than the smaller one.
For example, A company with a 100 billion market cap would receive 10 times more representation than a company with a 10 billion market cap.
Regarding the selection, a committee selected each of the 500 companies based on their liquidity, size and industry. The index is then rebalanced quarterly.
To calculate the S&P 500 index, the total sum of the capitalization of the 500 stocks is divided by a factor called the divisor. To find these figures, the total market capitalization can be found on the Standard & Poor website. However, the exact divisor number is not made public.
Regarding the criteria for acceptance, they are the following: first, the company must be in the United States. Then, the corporation must have a market cap of 10 billion and have at least 50% of its stock publicly traded. In addition, 50% of its fixed assets must be in the United States. Finally, the company must have at least four consecutive quarter with a positive income, including the last one.
As of August 31, 2020, the S&P had a breakdown by sector as follows:
- Information Technology: 27.5%
- Health Care: 14.6%
- Consumer Discretionary: 11.2%
- Communication Services: 10.9%
- Financials: 9.9%
- Industrials: 7.9%
- Consumer Staples: 7.0%
- Utilities: 3.1%
- Real Estate: 2.8%
- Materials: 2.6%
- Energy: 2.5%
MAIN POSITIONS (%)
APPLE INC 4.37 %
MICROSOFT CORP 3.57 %
AMAZON COM INC 2.85%
BERKSHIRE HATHAWAY INC CLASS B 1.74 %
JOHNSON & JOHNSON 1.64 %
JPMORGAN CHASE & CO 1.60 %
FACEBOOK CLASS A INC 1.59 %
EXXON MOBIL CORP 1.47 %
ALPHABET INC CLASS C 1.44 %
ALPHABET INC CLASS A 1.42 %
Positions are subject to change.
As we can see, the portfolio of the major companies is very diversified but with a strong focus on technology. This is mainly due to the importance of technology companies in today's world.
S&P 500 versus other major stock indices
The S&P 500 is one of the most popular indexes. However, it has differences compared to its peers.
The Dow Jones Industrial Average (DJIA) and S&P500 are the two most popular and followed indexes for the American market. Although investors may have a preference for one or another, they both have the same aim: to provide a general picture of the American stock market.
Compared to the Dow Jones, the S&P represents many more companies. The Dow tracks a list of the 30 companies that best represent their industry. The Dow is the highest rated index in the world with a market capitalization representation that accounts for almost a quarter of all U.S. stock markets.
Regarding the Nasdaq, the S&P 500 is far more diversified in terms of industries and sectors, as the Nasdaq focuses mainly on tech-related stocks. To give some figures, as of September 2020, the Nasdaq contains 48.13% of companies in the technology sector. The S&P 500 has only 20.72% for the same period.
Despite these differences, all these indexes tend to move together. If you focus only on one, you will be able to get an idea of how the US stock market and US economy is doing.
Final word on the S&P 500
The S&P 500 is a leading economic index that indicates how the United States economy is doing.
However, the S&P 500 only measures U.S. stocks, so investors should also have a look at other indices, such as the European, Chinese or Indian indices to have a more global view of the stock market.
Many different financial instruments are correlated with the S&P 500 such as the bond market for example. The S&P 500 is therefore an index of choice to analyze when making your investments, and you should always have an eye on it to see how it is doing.