What is the S&P500 Index?

The S&P 500 is a comprehensive stock market index that follows the performance of approximately 500 publicly traded US companies. It is widely regarded as the most accurate indicator of the overall health of the American stock market.

S&P Global, the parent company of the S&P 500, also oversees several other market indexes and operates one of the three major credit rating agencies. Its history dates back to 1860 when Henry Varnum Poor established an investment information service. In 1941, Poor’s Publishing merged with Standard Statistics to form Standard and Poor’s Corporation, a leading provider of financial data and analysis.

The S&P 500 is a key benchmark in finance. This article will explore the composition of the S&P 500. It will look at its main holdings and long-term performance.

What is the S&P 500?

The S&P 500 index brings together roughly 500 traded companies from the United States, spanning 11 sectors. Although named the S&P 500, the index actually includes 503 stocks because three companies have two classes of shares each. 

The index captures about 80% of the total market value of US stocks, making it an essential measure of the stock market’s health. It also serves as a tool for evaluating the performance of the stock market and the broader US economy.

Investors looking to mirror the market’s performance can invest in a US stock market index fund that follows the S&P 500. For businesses, being on the index can be good. It can lead to more demand for their shares from the index funds. This demand can drive up their share prices.

How does the S&P 500 Work?

The S&P 500 index’s method for selecting and weighting companies involves several key points:

To qualify for inclusion in the S&P 500, a company must meet the following criteria:

1. US-based and traded on a major US exchange: The company must be headquartered in the United States and its shares must be traded on a major US stock exchange.
2. Minimum market capitalization: The company must have a market capitalization of at least $15.8 billion and a float-adjusted market capitalization of at least 50% of the index’s total company-level minimum market capitalization threshold.
3. Positive earnings: The company must have reported positive earnings in the most recent quarter and in the previous four consecutive quarters.
4. Float-adjusted liquidity ratio: The company must have a float-adjusted liquidity ratio of 0.75 or greater.
5. Trading volume: The company must have traded a minimum of 250,000 shares in the previous six months before evaluation.

The S&P 500 weights companies by their market cap. Larger companies make up more of the index’s value.

What is the importance of the S&P 500 index for investors?

The S&P 500 index is a vital tool for investors for several reasons:

• Benchmarking performance: It provides a benchmark against which investors can measure the success of their own portfolios. If an investor’s portfolio outperforms the S&P 500, it suggests smart investment choices; underperformance might signal a need for strategy change.
• Economic indicator: The S&P 500 offers a snapshot of the US’s economic and financial well-being. A rising index suggests growing investor confidence and a strong economy, while a falling index may suggest economic troubles or uncertainty.
• Identifying opportunities: The composition of the S&P 500 index, which encompasses the top 500 traded companies in the US, serves as a valuable resource for investors seeking potential investment prospects. By analyzing the index, investors can target opportunities that align with broader market trends, and investing in these companies can offer a balanced exposure to the robust segments of the US economy associated with large-cap entities. This approach allows for strategic investment decisions in well-established companies with a proven track record.
• Influence on passive investing: The rise of passive investing through ETFs and index funds has bolstered the importance of the S&P 500. Investors in these funds seek to replicate the index’s performance, thereby participating in the performance of its constituent stocks.

What are the factors influencing the S&P 500?

Many factors affect the S&P 500. They include broad economic signals and specific company news. Understanding these influences is crucial for investors. Here’s a closer look at how each factor can sway the index:

• Economic indicators: For instance, when the US has a strong monthly jobs report from the Bureau of Labor Statistics indicating a drop in unemployment, it elevates investor confidence, resulting in a boost for the S&P 500, as evident in late 2021 reports. If inflation rates are higher than expected, as reported in early 2022, the market might react due to concerns about purchasing power and increased costs, leading to a dip in the index.
• Corporate earnings: Earnings reported by the companies within the S&P 500 can sway the index. For example, when Apple, which has a large weight in the index due to its market cap, reports earnings that exceed market expectations, it can lead to an uptick in the index. In contrast, if several major companies within the index report poor earnings, it can drag down the index, as seen in some tech companies’ reports in late 2020.
• Global events: International events can also have a notable impact. An example includes the initial phase of the COVID-19 pandemic in early 2020, which saw the S&P 500 plunge as countries went into lockdown. It rebounded by the end of the year, fueled by optimism around vaccine rollouts and economic reopening. Another instance is trade relations, such as when the U.S. and China eased trade tensions in 2019, leading to a rise in the index as investor confidence grew due to potential stability in global trade.

What is the average return of the S&P 500?

The S&P 500’s return has been 10% per year on average. This has been the case for the last few decades. This return includes dividends. It is important to note that this figure does not take inflation into account. The S&P 500’s annual total return for 2023 stood at 26.3%, rebounding from a negative return the previous year. This average is higher than the long-term average of approximately 10%. Despite inevitable market fluctuations and volatility, the index yielded positive returns most years.

For Indian investors analyzing these returns in INR, the fluctuating exchange rate between the USD and INR is a critical factor. Over the past decade, the compounded annual growth rate (CAGR) of the S&P 500 in INR terms has been over 14%, which suggests that the depreciation of the INR against the USD has favoured the returns when they’re converted back to the local currency.

What are the US market sectors covered under the S&P 500 index?

 

The S&P 500 Index encompasses a diverse array of sectors, representing a cross-section of the US economy. Here is a breakdown of the market sectors covered by the S&P 500 Index:

Top 10 Sectors in the S&P 500 by Weight
Information Technology	32.40%
Financials	12.59%
Health Care	12.21%
Consumer Discretionary	10.20%
Communications Services	8.67%
Industrials	7.49%
Consumer Staples	6.11%
Energy	3.32%
Utilities	2.61%
Real Estate	2.44%

How is the S&P 500 index different from the Nasdaq and Dow Jones?

Here’s a comparison between the S&P 500 Index, the Dow Jones Industrial Average (DJIA), and the Nasdaq, summarized point by point:

Difference between Nasdaq and S&P 500:

• The Nasdaq Composite, known for its extensive tech stock listings, includes over 3,000 companies on the Nasdaq stock exchange. The S&P 500 encompasses 500 of the largest companies across various industries, listed on both the NYSE and Nasdaq.
• The Nasdaq Composite’s performance relies on the tech sector. In contrast, the S&P 500’s sectors are more varied. They include technology, healthcare, financials, and consumer goods.

Difference between the S&P 500 and Dow Jones:

• The DJIA consists of only 30 large-cap companies, which makes it less diverse than the S&P 500. The S&P 500’s larger number of companies provides a more comprehensive snapshot of the U.S. economy.
• The DJIA is price-weighted, meaning that the companies with higher stock prices have more influence over the index. The S&P 500 is market-cap weighted, which means companies with larger market capitalizations have a bigger impact on the index.

The differences between the Nasdaq, S&P 500, and DJIA highlight the variety of options available for those looking to invest in US stocks. Each index offers a unique entry point into the US stock market, with the potential for growth and diversification. Through Vested, investors can access index ETFs to gain exposure to these indexes and the sectors they represent.