The S&P 500 is a US stock market index that measures the performance of 500 large publicly traded companies in the United States. It is the most widely followed equity index and is considered a benchmark of the overall health of the US stock market. The companies included in the index are chosen based on their market capitalisation, liquidity, and other factors. The S&P 500 is often considered a gauge of the performance of the US economy and is watched closely by investors, analysts, and economists.
- It must have a market capitalisation of a certain lower threshold.
- It must be a US company.
- It must have a public float of at least 50%.
- It must have adequate liquidity.
- It must have a reasonable price.
- It must be profitable for the most recent quarter and over the past four quarters combined.
After a company meets these criteria, it may be considered for inclusion in the index. The decision to include a company in the S&P 500 is ultimately made by the Index Committee, which is made up of a group of analysts and economists at S&P Global. The committee meets regularly to review and make changes to the composition of the index. If a company is selected for inclusion in the index, it will be added at the next quarterly rebalancing of the index.
S&P Dow Jones Indices introduced the requirement for a minimum market capitalisation of $8.2 billion in 2013 as part of their methodology for selecting companies for inclusion in the S&P 500 index. The introduction of the minimum market capitalisation requirement was intended to ensure that the companies included in the index were large and stable enough to represent the U.S stock market. The exact value of the minimum market capitalisation requirement is subject to change over time as the S&P 500 index methodology is reviewed and updated by S&P Dow Jones Indices.
Alternatives to S&P 500
- Dow Jones Industrial Average (DJIA): The DJIA is an index that tracks the performance of 30 large-cap US stocks. The DJIA is a widely recognised and one of the oldest indices but includes fewer stocks than the S&P 500.
- Nasdaq Composite Index: The Nasdaq Composite is an index that tracks the performance of over 3,000 US stocks listed on the Nasdaq exchange, including many technology and growth-oriented companies. The Nasdaq Composite is often considered a benchmark for the technology sector.
- CRSP US Total Market Index: The CRSP US Total Market Index is a market-capitalisation-weighted index that tracks the performance of nearly all publicly traded US stocks, including large-cap, mid-cap, and small-cap companies.
- Russell 2000 Index: The Russell 2000 is a stock market index that tracks the performance of 2,000 small-cap US stocks. The Russell 2000 is often used as a benchmark for small-cap stocks and can provide investors with exposure to smaller companies with potentially higher growth potential.
- MSCI ACWI Index: The MSCI All Country World Index (ACWI) is a global equity index that tracks the performance of large-cap and mid-cap stocks from multiple developed and emerging markets. The MSCI ACWI provides investors with exposure to both US and international equities.
- S&P 500 Equal Weight Index: The S&P 500 Equal Weight Index gives equal weight to each of the 500 companies in the S&P 500, rather than giving greater weight to the largest companies, providing a different perspective on the performance of the US stock market.
It is important to know that no index or benchmark is a perfect representation of the overall stock market.
Pros and cons of investing in the S&P 500 index
Some of the potential pros and cons of investing in the S&P 500 index include the following:
- Diversification: The S&P 500 provides exposure to a broad range of industries and sectors, offering investors a way to diversify their portfolio across many companies and potentially reduce their overall risk.
- Liquidity: The S&P 500 is a highly liquid market, with many buyers and sellers and a high trading volume, which means that investors can buy and sell shares easily and quickly.
- Performance: Over the long term, the S&P 500 has historically provided strong returns to investors, with an average annual return of around 10% over the past century.
- Low fees: Many mutual funds and ETFs that track the S&P 500 have low fees compared to actively managed funds, making it a cost-effective way for investors to gain exposure to the stock market.
- Concentration: The S&P 500 is heavily weighted towards large-cap companies, which means that a small number of stocks heavily influences the performance of the index. This can increase concentration risk and reduce diversification.
- Very limited international exposure: The S&P 500 only includes US-based companies, which means that it provides minimal exposure to non-US markets and economies.
History of S&P 500
- The S&P 500 was launched in 1926 by Standard & Poor’s, a financial services company that specialises in providing credit ratings, market indices, and investment research.
- The index was initially called the ‘Composite Index’ and included just 90 stocks.
- In 1957, the index was expanded to include 500 stocks and renamed the S&P 500.
- Over the decades, the S&P 500 has become one of the world’s most widely followed equity indices, with many investors and analysts using it as a benchmark for the US stock market.
- In 1976, the first index fund, the Vanguard 500 Index Fund, was launched, providing investors a low-cost way to gain exposure to the S&P 500.
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