Our Blog

The Anatomy of an Index

Did you know that more than $7 trillion in assets are benchmarked to the Standard & Poor’s 500 Composite Index,...


Did you know that more than $7 trillion in assets are benchmarked to the Standard & Poor’s 500 Composite Index, including $1.9 trillion in index assets?¹

The S&P 500 is ubiquitous—we see it on the TV news, read about it in the newspapers and very likely see some of our own investments’ performance compared against it. For an index that represents approximately 80% of the value of the U.S. equity market, it may be worthwhile to gain a better understanding of how it works.²

Cap & Criteria

The index, as we know it today, was introduced in 1957 and is maintained by Standard & Poor’s Index Committee. Contrary to popular belief, it is not comprised of the 500 largest companies in America, but is a collection of large-cap stocks representing a broad range of market sectors, including, among others, technology, energy, health care and consumer staples.³

There are a number of criteria a company must meet to be considered for inclusion in the index. Some of these criteria include: it must be a U.S. company, have a market capitalization of $4.6 billion or more, be an industry leader that is representative of a particular market sector and be financially viable.

Changes Over Time

Another common misconception is that the index is a static one. In fact, companies will be removed from time to time for reasons that include violating of one or more of the criteria used for adding companies, or because of a merger, acquisition or significant restructuring, including bankruptcy.

The turnover in the index’s constituent companies is usually around an annual rate of 3.5% to 4.5% on a market capitalization weighted basis, though it may be higher—for example, 8.9% in 2000, or lower, 1.45% in 2003.⁴

Add and Subtract

When changes are made to the index, many mutual funds and exchange-traded funds that seek to replicate the index may have to sell stocks that are being removed and buy the stocks that are being added in order to track the index. Keep in mind that amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less that their original cost.

Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

It should be emphasized that investors cannot invest in an index. Also, index performance is not indicative of the past performance of a particular investment and past performance does not guarantee future results. Investment choices designed to replicate any index may not perfectly track it, and their returns will be reduced by fees and expenses.

McGraw Hill Financial, January 2015. The S&P 500 Composite index (total return) is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results.
McGraw Hill Financial, May 2015
Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
McGraw Hill Financial, May 2015

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite.

Stangier Wealth Management is a registered investment adviser in the States of Oregon, Texas, and Washington. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

The S&P 500 is ubiquitous. Ever wonder how it works? #S&P500

Back

DISCLOSURE: Investment advisory services are offered through Gretchen Stangier, Inc. DBA Stangier Wealth Management (“Stangier Wealth Management”), an investment advisor registered with the U.S. Securities and Exchange Commission. Stangier Wealth Management only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided copies of the firm’s ADV Part 2A brochure and Part 3 documents.

DISCLAIMER: This website is for informational purposes only and does not constitute a complete description of our investment services or performance. This website is in no way a solicitation or offer to sell securities or investment advisory services except, where applicable, in states where we are registered or where an exemption or exclusion from such registration exists. Information throughout this site, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS OR ANY ‘LINKED’ WEBSITE.

You may also like

The Solar Cycle and Economic Cycles

According to NASA, the sun’s current cycle, known as Solar Cycle 24, is expected to reach its peak in early-…

Seven Questions to Ask Before Investing

We have all heard of the seven deadly sins, things that you should never do or you risk the harshest…

Market Timing: Risk vs. Reward

For first-time investors, putting money into the stock market may seem like an intimidating task. You may be asking yourself,…