5 Things You Didn’t Know About the S&P 500

by Dan Burrows | July 2, 2013 2:24 pm

5 Things You Didn’t Know About the S&P 500

By this time next week, Sprint (S[1]) will no longer be part of the S&P 500, the most important benchmark for the biggest equity market in the world.

What did the wireless service provider do to deserve such an ignominious fate?

Nothing.

Sprint is selling the bulk of itself to Japanese telecom Softbank (SFTBY[2]). Once the deal is done, Sprint will no longer meet certain criteria to be included in the S&P 500. No biggie, really.

You see, it turns out that among the many characteristics a stock must have for inclusion in the benchmark index, one is that its public float — or shares available for trading on the open market — must be at least 50%.

But then, there are all sorts of hurdles an equity must clear to be considered for membership in the  S&P 500, including a U.S. domicile, a market capitalization of at least $4.6 billion and four straight quarters of as-reported profitability.

There are a bunch more peculiarities to the S&P 500, which got us thinking about how little most of us know about the key gauge of  U.S. stock market performance. Here are five things you probably didn’t know about the S&P 500:

  1. The S&P 500 is not comprised of the 500 largest companies listed on U.S. markets — not by market cap, revenue or profits. Rather, the S&P 500 is selected by committee. A stock has to meet certain requirements like those touched on above, but after that, inclusion in the index is somewhat subjective. The committee strives to make the index “reflect the U.S. equity markets and, through the markets, the U.S. economy.” As currently constructed, the S&P 500 covers about 75% of the U.S. market by value.
  2. As part of its efforts to reflect the markets and, by extension, the U.S. economy, the S&P 500 is broken down into 10 major sectors: Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Information Technology, Materials, Telecommunications Services and Utilities. Tech is currently the biggest part of the S&P 500, accounting for 17.8% of the gauge’s total market cap. Financials come in second with 16.7%. The smallest sectors are Telecoms, at just 2.8% of the index, then Materials and Utilities at 3.3% each.
  3. The S&P 500′s best year was much better than its worst year. The index traces its history back to 1923, when it was based on just 90 stocks. It didn’t expand to become the S&P 500 until 1957. The single-best year for the S&P 500 in its current incarnation was set in 1958, when investors enjoyed a price gain (excluding dividends) of 43%. Unfortunately, the year the index posted its worst yearly loss is still very much fresh in investors’ minds: It lost 38% in calendar year 2008.
  4. In many circles, the Dow Jones Industrial Average still remains a more popular way of talking about the U.S. stock market than the S&P 500. But professionals don’t have much use for the blue-chip index as a gauge of U.S. equities. It only contains 30 companies, for one thing. More importantly, the Dow doesn’t have nearly the same sway in the constellation of index funds, ETFs, options and other products. More than $5.58 trillion is benchmarked to the S&P 500. Meanwhile, in the options market, the E-mini S&P 500 is the most popular equity index futures contract in the world.
  5. The S&P 500 is nowhere near its real all-time high. Yes, the index notched a new record close of 1669 on May 21, making back everything it lost in the 2008-09 crash and then some. But after adjusting for inflation — which is a must for anyone investing for retirement — the S&P 500 hit its real all-time high of 1995 back in August 2000, according to economist Robert Shiller. That’s a whopping 23% higher than where the index trades today.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  2. SFTBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SFTBY

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