The S&P 500 Index: Standard & Poor's 500 Index

What Is the S&P 500 Index?

The S&P 500 Index, or Standard & Poor's 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria to be included in the index. The index is regarded as one of the best gauges of large-cap U.S. equities. Another common U.S. stock market benchmark is the Dow Jones Industrial Average (DJIA).

Key Takeaways

  • The S&P 500 Index features 500 leading U.S. publicly traded companies, with primary emphasis on market capitalization.
  • The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading.
  • Because it is widely considered the best gauge of large-cap U.S. equities, many funds are designed to track the performance of the S&P 500.

Standard And Poor's 500 Index

Weighting Formula and Calculation for the S&P 500

The S&P 500 uses a market cap weighting method, giving a higher percentage allocation to companies with the largest market capitalizations.

Company Weighting in S & P = Company market cap Total of all market caps \text{Company Weighting in S \& P}= \frac{\text{Company market cap}}{\text{Total of all market caps}} Company Weighting in S & P=Total of all market capsCompany market cap

Determination of the weighting of each component of the S&P 500 begins with adding up the total market cap for the index by adding together the market cap of every company in the index.

For review, the market cap of a company is calculated by taking the current stock price and multiplying it by the company's outstanding shares. Fortunately, the total market cap for the S&P 500, as well as the market caps of individual companies, is published frequently on financial websites, saving investors the need to calculate them.

The weighting of each company in the index is calculated by taking the company's market cap and dividing it by the total market cap of the index.

S&P 500 Index Construction

The S&P only uses free-floating shares when calculating market cap, meaning the shares that the public can trade. The S&P adjusts each company's market cap to compensate for new share issues or company mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor. Unfortunately, the divisor is proprietary information of the S&P and is not released to the public.

However, we can calculate a company's weighting in the index, which can provide investors with valuable information. If a stock rises or falls, we can get a sense as to whether it might have an impact on the overall index. For example, a company with a 10% weighting will have a greater impact on the value of the index than a company with a 2% weighting.

The S&P 500 is one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. The S&P 500 focuses on the U.S. market's large-cap sector and is also a float-weighted index (a type of capitalization weighting), meaning company market capitalizations are adjusted by the number of shares available for public trading.

The S&P 500's most recent rebalancing was announced on Sept. 3, 2021, and took effect before markets opened on Sept. 20, 2021. Match Group Inc. (MTCH) replaced Perrigo Company plc (PRGO) in the index. (Match was formerly owned by InterActive Corp, (IAC), which is the parent company of Investopedia.) S&P MidCap 400 constituents Ceridian HCM Holding Inc. (CDAY), and Brown & Brown Inc. (BRO) moved to the S&P 500, replacing Unum Group (UNM) and NOV Inc. (NOV).

S&P 500 vs. DJIA

The S&P 500 is often the institutional investor's preferred index given its depth and breadth, while the Dow Jones Industrial Average (DJIA) has historically been associated with the retail investor's gauge of the U.S. stock market. Institutional investors perceive the S&P 500 as more representative of U.S. equity markets because it comprises more stocks across all sectors (500 versus the Dow's 30).

Furthermore, the S&P 500 uses a market cap weighting method, giving a higher percentage allocation to companies with the largest market capitalizations, while the DJIA is a price-weighted index that gives companies with higher stock prices a higher index weighting. The market-cap-weighted structure tends to be more common than the price-weighted across U.S. indexes.

S&P vs. Russell Indexes

The S&P 500 is a member of a set of indexes created by the Standard & Poor's company. The Standard & Poor's set of indexes are like the Russell index family in that both are market-cap-weighted (unless stated otherwise, like equal-weighted) indexes.

However, there are two large differences between the construction of the S&P and Russell families of indexes. First, Standard & Poor's chooses constituent companies via a committee, while Russell indexes use a formula to choose stocks to include. Second, there is no name overlap within S&P style indices (growth versus value), while Russell indexes will include the same company in both the "value" and "growth" style indexes.

Other S&P Indices

The S&P 500 is a member of the S&P Global 1200 family of indices. Other popular indices include the S&P MidCap 400, which represents the mid-cap range of companies, and the S&P SmallCap 600, which represents small-cap companies. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 combine to create a U.S. all-capitalization index known as the S&P Composite 1500.

S&P 500 vs. Vanguard 500 Fund

The Vanguard 500 Index Fund seeks to track the price and yield performance of the S&P 500 Index by investing its total net assets in the stocks comprising the index and holding each component with approximately the same weight as the S&P index. In this way, the fund barely deviates from the S&P, which it is designed to mimic.

The S&P 500 is an index, but for those who want to invest in the companies that comprise the S&P, they must invest in a fund that tracks the index such as the Vanguard 500 ETF (VOO).

Limitations of the S&P 500 Index

One of the limitations to the S&P and other market-cap-weighted indexes arises when stocks in the index become overvalued, meaning they rise higher than their fundamentals warrant. If a stock has a heavy weighting in the index while being overvalued, the stock typically inflates the overall value or price of the index.

A rising market cap of a company isn't necessarily indicative of a company's fundamentals, but rather it reflects the stock's increase in value relative to shares outstanding. As a result, equal-weighted indexes have become increasingly popular whereby each company's stock price movements have an equal impact on the index.

S&P 500 Market Cap Example

In order to understand how the underlying stocks affect the S&P index, the individual market weights must be calculated, which is done by dividing the market capitalization of each company by the total market capitalization of the index. Below is an example of Apple's weighting in the index:

  • Apple Inc. (AAPL) reported 16,530,166,000 basic common shares issued and outstanding as of July 15, 2021, and had a stock price of $141 as of Oct. 13, 2021.
  • Apple's market capitalization was $2.33 trillion (or 16.53 billion x $141). The $2.33 trillion is used as the numerator in the index calculation.
  • The S&P 500 total market cap was approximately $38.41 trillion, which is the sum of the market caps for all of the stocks in the index.
  • Apple's weighting in the index was 6.1%, or $2.33 trillion / $38.41 trillion.

Overall, the larger the market weight of a company, the more impact each 1% change in a stock’s price will have on the index. Note that the S&P does not currently provide the total list of all 500 companies on its website, outside of the top 10.

Article Sources

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