Did you know that an estimated $13.5 trillion in assets are indexed or benchmarked to the Standard & Poor’s 500 Composite Index, including $5.4 trillion in index assets?1
The S&P 500 is ubiquitous – we see it on the news, read about it in the newspapers, and very likely, see some of our own investments’ performance compared to it. For an index that represents approximately 80% of the value of the U.S. equity market, it may be worthwhile to gain a better understanding of how it works.1
Cap & Criteria
The index, as we know it today, was introduced in 1957 and is maintained by the Standard & Poor’s Index Committee. Contrary to popular belief, it is not comprised of the 500 largest companies in America but is a collection of large-cap stocks representing a broad range of market sectors, including technology, energy, health care, and consumer staples.2
There are a number of criteria a company must meet to be considered for inclusion in the index. Some of these criteria include the following: it must be a U.S. company, have an unadjusted market capitalization of $14.6 billion or more, have 50% of its stock available to the public, and have four consecutive quarters of positive earnings.2
Changes Over Time
Another common misconception is that the index is a static one. In fact, companies will be removed, from time to time, for reasons that include violation of one or more of the criteria used for adding companies or because of a merger, acquisition, or significant restructuring, including bankruptcy.
The turnover in the index’s constituent companies was 3.6% in 2020 (per the most recent data available). According to one projection, the average tenure of companies in the index is expected to fall to 15-20 years this decade, as compared to the 30-35 year average tenure in the late 1970s.3
Add and Subtract
When changes are made to the index, many mutual funds and exchange-traded funds seeking to replicate the index may have to sell stocks being removed and buy the stocks being added to track the index. Keep in mind that amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.
Mutual funds and exchange-traded funds are sold only by prospectus. Before investing, please carefully consider the charges, risks, expenses, and investment objectives. Your financial professional can obtain a prospectus containing this and other information about the investment company. Read it carefully before you invest or send money.
Investors cannot invest in an index. Also, index performance is not indicative of the past performance of a particular investment, and past performance does not guarantee future results. Investment choices designed to replicate any index may not perfectly track it, and their returns will be reduced by fees and expenses.
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.