The S&P 500, which is short for Standard & Poor’s 500, is a market-capitalization-weighted index of 500 leading public companies in the U.S. and is one of the most widely-used indexes for the U.S. stock market. Why? Because it serves as a barometer of the overall stock market’s performance and an indicator of how large corporations are performing. Market participants closely watch the index since its performance represents a gauge of the entire equities market and the U.S. economy overall.
What is the symbol for S&P 500?
^GSPC, SPX, and INX are some of the ticker symbols for the S&P 500 index. A ticker symbol is a series of letters and/or numbers used to represent a stock of a company, futures, options, indices, and other publicly traded securities.
When was the S&P 500 created?
The origin of the S&P 500 goes back to 1923, when the Standard Statistics Bureau and Poor’s Publishing introduced a series of indices that included 233 companies and covered 26 industries.
In 1941, Poor’s Publishing merged with Standard Statistics Company to become Standard & Poor’s Corp. The S&P 500, as it is now known, was introduced on March 4, 1957.
Stocks in the S&P 500
S&P Dow Jones Indices, which is a joint venture between S&P Global, the CME Group, and News Corp (its best-known indices are the S&P 500 and the Dow Jones Industrial Average), identify important industries, approximate the relative weight of these industries in terms of market capitalization, and then allocate a representative sample of stocks within each industry to the S&P 500 index.
The S&P 500 Index represents more than 80% of the total U.S. equity market capitalization, with the ten largest constituents (based on market capitalization) as listed below:
• Apple Inc. (NASDAQ: AAPL)
• Microsoft Corporation (NASDAQ: MSFT)
• Amazon.com, Inc. (NASDAQ: AMZN)
• Tesla, Inc. (NASDAQ: TSLA)
• Alphabet Inc. (NASDAQ: GOOG)
• Berkshire Hathaway Inc. (NYSE: BRK-B)
• UnitedHealth Group Incorporated (NYSE: UNH)
• Johnson & Johnson (NYSE: JNJ)
• Exxon Mobil Corporation (NYSE: XOM)
• JPMorgan Chase & Co. (NYSE: JPM)
While exactly 500 companies constitute the index, there are 503 symbols, as several companies have two share classes, such as Google’s parent company Alphabet with Class A (GOOGL) and Class C (GOOG) shares in the index.
In order to be eligible to be included in the S&P 500 Index, a company must be a publicly traded U.S.-based company, meet specific criteria for market capitalization and liquidity, have a public float of at least 10% of its shares outstanding, and have positive earnings over the trailing four quarters.
Average S&P 500 return
The average annualized return of the S&P 500 is 11.88% (from 1957 to 2021). The table below shows S&P 500 historical returns (with dividends) in the last ten years.
Weighting of S&P 500
Given that S&P 500 is a market-capitalization-weighted index, the largest companies have the greatest weight and thus the greatest influence on the index performance.
First, let’s understand how the index value is calculated.
- The total market capitalization of the S&P 500 index is obtained by summing the market capitalizations of all constituent stocks.
- To obtain the index value of the S&P 500, the total market capitalization is divided by an Index Divisor, which is a standardization figure developed by Standard & Poor’s.
The divisor is continuously adjusted for events, such as dividend payments, stock splits, stock buybacks, and spinoffs, to ensure that these factors do not affect the index.
We will show this by the following example: Microsoft reported approximately 7.45 billion common shares outstanding as of Sept 23, 2022, and its closing share price was about $237.92. That gives the company a free-float market capitalization of $1.77 trillion. As of Sept 23, 2022, the S&P total market cap was about $30.97 trillion. This implies that Microsoft makes up roughly 5.72% of the index’s market weight. Thus, a 1% price change in Microsoft’s stock price will affect the S&P 500 index value more than a similar stock price change of a smaller company in the index.
One of the limitations of the S&P 500 index arises when constituent stocks become overvalued, meaning the price rises higher than the company’s fundamentals warrant. If a stock, such as Microsoft, has a heavy weighting in the index while being overvalued, it inflates the overall value of the index.
Gold vs. S&P 500
Gold price performance relative to the S&P 500 can be useful for market participants to gauge investors’ sentiment about stocks and gold. It may be useful for investors to take a look at the S&P 500-to-gold ratio in their decision-making process of asset allocation, which is a strategy in which investors divide their portfolios between different asset classes to minimize investment risks.
S&P 500 vs. Nasdaq 100
The Nasdaq 100 Index tracks the performance of the 100 largest stocks listed on the Nasdaq Stock Exchange, which is a global electronic marketplace for trading securities. The index includes companies from various industries, excluding the financial industry, with a large portion of the index constituting companies in the technology sector, which accounts for 56% of the index’s weight.
The Nasdaq 100 index is constructed on a modified capitalization methodology, which uses individual weights of stocks according to their market capitalization. Weighting allows constraints to limit the largest companies’ influence on the index value. Each quarter, Nasdaq reviews the composition of the index and adjusts weightings if the distribution requirements are not met.
While a number of large-cap companies overlap in the components of Nasdaq 100 and S&P 500, Nasdaq’s heavy allocation towards top-performing industries such as Technology, Consumer Discretionary, and Health Care, helped the index outperform the S&P 500 by a large margin in the last 15 years.
S&P 500 vs. Dow Jones
Another popular U.S. stock market benchmark is the Dow Jones Industrial Average (DJIA), also known as Dow Jones, or simply the Dow.
One of the key differences between Dow Jones and the S&P 500 is the weighting method used for the construction of the index. Dow Jones is a price-weighted index, meaning price changes in the highest-priced stocks have a greater influence on the index value than similar price changes in the lower-priced stocks. In contrast, the S&P 500 is a market-capitalization-weighted index, giving a higher percentage allocation to the companies with the largest market caps.
Furthermore, investors view S&P 500 as more representative of the overall U.S. equity market as it comprises more stocks across all sectors (500 stocks vs. Dow’s 30).
Both of the indices are calculated as (1) price return indices and (2) total return indices. The difference is that the latter includes the impact of reinvesting the dividends paid by the constituent companies.
S&P 500 vs. SPY
The SPDR S&P 500 ETF Trust, also known as the SPY ETF, is one of the most actively traded funds that aims to track the S&P 500 Index, providing investors a way to own the entire index by owning a single security.
Introduced in 1993, SPY was the first index exchange-traded fund (ETF) listed on U.S. exchanges. It has gone from having just $6.53 million in assets when it began to more than $330 billion in assets now.
SPY’s share price is one-tenth of the S&P 500 value. So, if the S&P 500 is at a level of 3,600, then one SPY share trades at around $360.
Is S&P 500 a good investment?
Over long-term horizons, passively holding the S&P 500 index often produces better results than actively managed portfolios. But S&P 500 is an index, so it can’t be traded directly.
One of the ways to invest in the S&P 500 is to purchase shares of a mutual fund or exchange-traded fund (ETF) that tracks the index, such as the SPDR S&P 500 ETF Trust (SPY) or the Vanguard 500 ETF (VOO). These funds’ performance mirrors the performance of the S&P 500 index itself.
The ETFs tracking the S&P 500 are suitable for investors willing to take on a moderate level of risk and have exposure to the U.S. equity market. From 1957 to 2021, the S&P 500 yielded an annualized average return of 11.88%.
Investors looking at such ETFs should consider the expense ratio, as well as other factors before choosing one to invest in. The SPY has an approximately 0.09% expense ratio, while VOO’s expense ratio stands at around 0.03%.
Does S&P 500 pay dividends?
S&P 500 is an index, so it can’t be traded directly. But the ETFs that track the performance of the S&P 500 index, such as the SPDR S&P 500 ETF Trust (SPY) and the Vanguard 500 ETF (VOO), do pay dividends.
For instance, SPY’s dividend yield is roughly 1.5%. It collects the dividends issued by all the dividend-paying companies in the S&P 500 index and pays them to the holders of the SPY ETF.
How to short S&P 500
There are several ways to short the S&P 500, such as to short sell the SPDR S&P 500 ETF Trust (SPY) or the Vanguard 500 ETF (VOO), or buy an inverse ETF (e.g. Direxion Daily S&P 500 Bear Leveraged ETFs), that match the inverse performance of the S&P 500 Index, meaning they go up when the S&P 500 goes down. There are several leveraged short ETFs that return twice or three times the inverse return of the S&P 500 index.
Alternatively, you can buy put options on the S&P 500 ETF, which gives you the right to sell the security at a specified price on or before a specified date.