QUOTE AND NEWS
Forbes  2 hrs ago  Comment 
In early trading on Friday, shares of Rockwell Collins (COL) topped the list of the day's best performing components of the S&P 500 index, trading up 4.1%.  Year to date, Rockwell Collins registers a 9.6% gain.
MarketWatch  2 hrs ago  Comment 
S&P and Dow extend push into record territory as U.S. stock markets open Friday
Market Intelligence Center  4 hrs ago  Comment 
After closing Thursday at $92.54, iShares MSCI S&P 500 Value Index (IVE) presents an attractive opportunity to get a 2.74% return in just 120 days, which is an annualized return of 8.34% (for comparison purposes only). To enter this trade, sell...
SeekingAlpha  4 hrs ago  Comment 
By James A. Kostohryz: I been very clear in my Seeking Alpha writings on the subject of "bubbles" that I do not believe that any portion of the stock market advance from March of 2009 until now can be properly characterized as a "bubble." In...
Wall Street Journal  Sep 18  Comment 
The Dow industrials and S&P 500 rallied to all-time highs Thursday as investors were heartened by signals from the Federal Reserve that it remains on a measured course to eventually raise interest rates.
SeekingAlpha  Sep 18  Comment 
By Investing Doc: My few forays beyond individual issues have been primarily limited to indexes with fairly limited holdings. My previous analysis of individual DJIA (NYSEARCA:DIA) components, for example, found that the market was slimly...
Forbes  Sep 18  Comment 
The markets appear to have survived the long awaited FOMC meeting as the financial media has been obsessed over what the Fed may or may not say. Much of the selling in the past week seems to have been related to speculation that the wording of...
New York Times  Sep 18  Comment 
Eight of 10 industry groups in the Standard & Poor’s 500-stock index rose a day after the Federal Reserve indicated it was in no hurry to raise a major bank interest rate.
MarketWatch  Sep 18  Comment 
The S&P 500 and Dow Jones Industrial Average close at record levels on Thursday as investors welcome the Federal Reserve’s commitment to low interest rates long after the ending of monetary stimulus.
SeekingAlpha  Sep 18  Comment 
Financial Times  Sep 18  Comment 
US and European stocks advance but the dollar loses its upward momentum in the wake of the Federal Reserve’s latest policy statement




 

This article is about the S&P 500 index. For the article on the company SPX Corporation, click here.

The S&P 500 is a stock market index containing the stocks of 500 American Large-Cap corporations. The index is owned and maintained by Standard & Poor's, a division of McGraw-Hill. All of the stocks in the index trade on the two largest US stock markets, the New York Stock Exchange and Nasdaq. The Dow Jones Industrial Average and the S&P 500 are the most widely watched indexes of large-cap US stocks. The S&P 500 is often quoted using the symbol SPX or INX, and may be prefixed with a caret (^) or with a dollar sign ($).

Many index funds and exchange-traded funds track the performance of the S&P 500 by holding the same stocks as the index, in the same proportions, and thus attempt to match its performance (before fees and expenses). Partly because of this, a company which has its stock added to the list may see a boost in its stock price as the managers of the mutual funds must purchase that company's stock in order to match the funds' composition to that of the S&P 500 index. Additionally, the S&P 500 index is often used as a baseline level of performance against which mutual funds and other asset managers' performance is measured.

Composition of the S&P 500 Index

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S&P 500 sector break-down[1]

The S&P 500 index is not made up of the 500 largest corporations in the U.S., since other factors such as liquidity of the stock and industry grouping are also considered in selecting members for the index.

The criteria for being added to the index are as follows:

  • Must be a "U.S. company". This is determined by looking at location of company's operations, its corporate structure, its accounting structure and its exchange listing.
  • Must have minimum $5 billion market capitalization. The minimum is reviewed occasionally to ensure that it takes in to account market conditions.
  • Must have a minimum public float of 50%, which means that at least half of the company's share must be publicly tradable.
  • Must be financially viable. Companies are expected to have at least four consecutive quarters of positive as-reported earnings
  • Must be operating companies. Closed-end funds, holding companies, partnerships, investment vehicles and royalty trusts are not eligible while Real Estate Investment Trusts (REITs) and business development companies (BDCs) are eligible for inclusion to the index.
  • Should have adequate liquidity and moderate price per share. The ratio of annual dollar value traded to market capitalization for the company should be 0.30 or greater. Very low or extremely high priced shares are also considered to be illiquid.
  • The index must remain reflective of the various sectors in the U.S. economy. This signifies that even if a company has all the qualifying characteristics, it may not be selected if the sector it operates in is already accounted for in the index.

It should be noted that these criteria are applicable to companies that are being added to the S&P 500. Since the index committee attempts to minimize unnecessary turnover in index membership, existing companies do not have to diligently maintain these conditions to remain in the index. However, companies that substantially violate one or more of these criteria are removed from the index and replaced by a new company. As a result, on a year-to-year basis, the composition of the index only changes slightly.

As of December 31 2009, the largest constituents of the were[2]:

Company Adjusted Market Cap ($ billions) Index Weight
Exxon Mobil323.73.26%
Microsoft235.52.37%
Apple189.91.91%
Johnson and Johnson177.71.79%
Procter & Gamble177.11.78%
IBM172.01.73%
AT&T165.41.67%
JPMorgan Chase & Co.164.21.65%
General Electric161.11.62%
Chevron154.51.56%

S&P 500 Index Calculation

The Standard & Poor's 500 Index is calculated using a base-weighted aggregate methodology; that means the level of the Index reflects the total market capitalization of all 500 component stocks relative to a particular base period. The S&P 500's base period is 1941-43. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 10. This is often indicated by the notation 1941-43=10.

In practice, the daily calculation of the Standard & Poor's 500 Index is computed by dividing the total market value of the 500 companies in the Index by a number called the Index Divisor. By itself, the Divisor is an arbitrary number. However, in the context of the calculation of the S&P 500 Index, it is the only link to the original base period value of the Index. The Divisor keeps the Index comparable over time and is the manipulation point for all Index Maintenance adjustments.[3]

In 2005, the Index was changed to be "float" weighted, i.e. the index weighting is determined by the amount of shares available for public trading. It works exactly the same way as the market-cap weighting, only that instead of making each component proportional to their respective market capitalization, they are made to be proportional to their public float. When Google was included in the index in March 2006, only its Class A shares, which are publicly traded, were used to determine Google's weight in the index. Only a minority of companies in the index have this sort of public float lower than their total capitalization; for most companies in the index S&P considers all shares to be part of the public float and thus the capitalization used in the index calculation equals the market capitalization for those companies.[4]

Impact of constituent's share price change

Being a market-value weighted index, changes in price for companies with higher market capitalization has a proportionally larger impact on the index. For example: In June 2008, Exxon Mobil's weight in the S&P 500 Index was roughly 4.2%. If Exxon Mobil's market capitalization increased by 10%, it would cause the S&P 500 to rise by

10%*4.2% = 0.42%

On the other hand, Apple's weight in the index, in June 2008, was 1.3%. Therefore if Apple's market capitalization increased by 10%, it would cause the index to rise by

10%*1.3% = 0.13%

Index Maintenance

In order to keep the S&P 500 Index comparable across time, the index needs to take into account corporate actions such as stock splits, share issuance, dividends and restructuring events (such as merger or spinoffs). Additionally, in order to keep the Index reflective of U.S. stocks, the constituents need to be changed from time to time.

To prevent the value of the Index from changing due to corporate actions, all corporate actions which affect the market value of the Index require a Divisor adjustment. Also, when a company is dropped and replaced by another with a different market capitalization, the divisor needs to be adjusted so that the value of the S&P 500 Index remains constant. All Divisor adjustments are made after the close of trading and after the calculation of the closing value of the S&P 500 Index.

Type of Action Divisor Adjustment
Stock Split (e.g. 2x1)No
Share IssuanceYes
Share RepurchaseYes
Special Cash DividendYes
Company ChangeYes
Rights offeringYes
SpinoffsYes
MergersYes

Investing in the S&P 500 Index

Retail investors can place bets on the S&P 500 through several ways:

  • Mutual fund's such as Vangaurd Index Trust 500 also provide investors with engineered S&P 500 returns. Vanguard is widely regarded as the lowest cost ETF manager.

Moreover, the top 45 companies in the index constitute 50% of the index. Thus an average investor could engineer the index to a great extent by holding these companies in the right proportion.

Historical S&P Performance

 Historical Earnings and Dividends
Historical Earnings and Dividends[5]
 Historical Earnings and Dividend Yield
Historical Earnings and Dividend Yield[6]

References

  1. Standard and Poor's 500 Index Factsheet, retrieved 8/29/08
  2. Standard and Poor's 500 Index Factsheet, retrieved 2/13/10
  3. S&p 500 Index Calculation, Retrieved 9/15/08
  4. S&P 500, 7676656Wikipedia.org, Retrieved September 3, 2008
  5. Standard and Poor's 500 Earnings & Estimate Report, retrieved 1/2209
  6. Standard and Poor's 500 Earnings & Estimate Report, retrieved 1/2209
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