This article explains what makes the S&P 500 Index stand out among other indices. Before we elaborate on the S&P 500, however, a short definition of an index is in order.
An index is a method to evaluate the performance of a group of assets. As a rule, indices measure the performance of a group of securities meant to replicate a specific area of the market. These can be so-called broad-based indices tracking the whole market. Indices can also be more specialized, evaluating a specific industry or a segment.
What Is the S&P 500 Index?
The index under discussion is called the Standard & Poor’s 500 Index, or the S&P 500 for short. It is an index of the 500 largest US companies which are traded publicly. The index is market-capitalization weighted; that is, it is a type of the index where its individual components are included in amounts corresponding to their total market capitalization, shortened as “market cap”.
What Companies Are Eligible for S&P 500 Inclusion?
Note that the S&P 500 is not a list of exactly 500 US companies by market capitalization, since there are other criteria by which companies get included in the index. To be eligible for S&P 500 index inclusion, a company should satisfy the following criteria:
- Be a US company;
- Have a market capitalization of at least USD 11.8 billion;
- Be highly liquid;
- Have a public float of at least 10% of its shares outstanding;
- Its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.
What Companies Are Listed on the S&P 500?
The S&P 500 Index is viewed as the best gauge of large-cap US equities. The Index does not provide the full list of 500 companies, many of which include technology companies and financial businesses. The top ten S&P 500 companies by Index weighting are the following:
- Apple Inc. (AAPL), index weighting is 5.9%.
- Microsoft Corp. (MSFT), index weighting is 5.4%.
- Amazon.com., Inc, index weighting is 4.2%.
- Facebook, Inc. (FB), index weighting is 2.2%.
- Alphabet Inc. Class A (GOOGL), index weighting is 2.0%.
- Alphabet Inc. Class C (GOOG), index weighting is 2.0%.
- Tesla Inc. (TSLA), index weighting is 1.5%.
- Berkshire Hathaway Inc. (BRK.B), index weighting is 1.5%.
- JPMorgan Chase & Co. (JPM0, index weighting is 1.3%.
- Johnson & Johnson (JNJ), index weighting is 1.2%.
While many of these above-mentioned companies may be household names, broad popular familiarity is not a requirement. That means that the index also includes lesser-known companies, so long as they meet the criteria for index inclusion.
What Is Inside the S&P 500 Index?
There are eleven sectors included in the S&P 500 Index, according to the Global Industry Classification Standard:
- Consumer Discretionary;
- Consumer Staples;
- Health Care;
- Information Technology;
- Communication Services;
- Real Estate;
These sectors are further divided into 24 industry groups, 69 industries, and 158 sub-industries. The S&P 500 represents more than 83% of the total domestic U.S. equity market capitalization. The S&P Composite 1500®, which comprises the S&P 500, S&P MidCap 400®, and S&P SmallCap 600®, represents over 90% of the S&P TMI (Total Market Index).
History of the S&P 500
The origin of the S&P 500 goes back to 1923, when Standard & Poor’s introduced indices that included 233 companies spread over 26 industries. The S&P 500, as it is now known, was introduced in 1957. The S&P 500 is regarded as a proxy for the U.S. equity market. It is the only stock market benchmark serving as an economic indicator in The Conference Board Leading Economic Index. It has stood for U.S. stock market performance in that context since 1968.
S&P 500 Index Construction
In order to calculate the market capitalization of a company, one needs to multiply the current stock price by the outstanding shares; that is, those shares that are shown on a company’s balance sheet under the heading Capital Stock. Note that the S&P only uses free-floating shares or the shares that are traded by the public. The S&P 500 adjusts each company’s cap to compensate for the issues of new shares or companies’ mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor.
Investors can calculate how much a particular company weights in the index. This information is important: if a stock jumps or sinks, investors, by calculating its weight, can understand whether it might have an impact on the S&P 500 as a whole. A company with a 15% weighting will affect the value of the S&P 500 more than a company with a 1% weighting.
S&P 500 Most Recent Rebalancing
The S&P 500 was rebalanced last time on March 12, 2021. The rebalancing was brought into effect on March 22, 2021, before markets opened. NXP Semiconductors (NXPI), Penn National Gaming (PENN), Generac Holdings (GNRC), Caesars Entertainment (CZR) were included on the list of S&P 500 companies. Xerox Holdings (XRX), Flowserve (FLS), SL Green Realty (SLG), and Vontier (VNT) were crossed out of the list.