S&P 500

Standard & Poor Global (S&P) is an American credit rating agency and a publisher of research and analysis on stocks, bonds and commodities. Dow Jones & Company is another publishing firm that is owned by News Corp, the company that also publishes Wall Street Journal, Barron’s, Market Watch, Mansion Global, Financial News and Private Equity News.

S&P Dow Jones Indices is a joint venture majority owned by S&P Global. This joint venture maintains one of the most popular stock index - S&P 500 - that is constantly referred to in the news and market. Many investors treat this index as a benchmark when managing their portfolio i.e. Risk vs Return. The other very popular index maintained by the joint venture is DJIA 30 (Dow Jones Industrial Average)

S&P 500 is a container for the largest U.S. stocks weighted by their market capitalisation. Market Capitalization is the product of share price and the number of outstanding shares traded in the public market. Nearly 80% of the U.S. stock market (in terms of capitalisation) is made up of the S&P 500 companies.

To be added to S&P 500, the following key criteria must me met (at a minimum):

• Stock must be a U.S. incorporated company

• The market capitalisation must be greater than $5.5bn

• Publicly traded shares in the secondary market should represent at least 50% of outstanding shares

• Company must have reported positive earnings in the most recent quarter, as well as over the four most recent quarters

• The stock must have an active market and must trade for a reasonable share price (the word reasonable implies this criteria is very subjective and is up to S&P’s perception of reasonable price)

Meeting the above criteria does not guarantee inclusion in the S&P 500 index. These are just minimum requirements.

After the largest 500 stocks are added to the S&P 500 index, a weighting is provided to each stock. The weighting for a stock is based on its market capitalisation relative to the overall market capitalisation of the index. For example: if Company A has a market cap of $1tn and the total market cap of the index is $20tn, the weighting provided to Company A is 1 / 20 = 5%.

Weighting by market cap can have the unintended effect of hiding the weakness or strength of smaller companies in the index. Larger market cap stocks will get higher proportion i.e. higher weightings in the index. Therefore, mega-cap stocks (particularly Tech stocks) like Microsoft, Apple, Amazon, Google and Facebook make up a large proportion of the S&P 500 index. Having said this, the index structure represents the overall economy due to its inclusion of a diverse set of 500 companies spread across industries and sectors. The other popular index that is constantly talked about in the news and markets is DJIA - Dow Jones Industrial Average. This index comprises of the top 30 companies, leading to a more narrow reflection compared to S&P 500. And DJIA is based on price-weighting rather than the market-cap-weighting approach folllowed in S&P 500. We will discuss DJIA methodology and composition in another post.

If you want to invest in S&P 500, it’s not practical to purchase shares in all the 500 companies that make up the index. However, you can get exposure to these companies by investing in an Index Fund. These can be in the form of a Mutual Fund or Exchange Traded Fund (ETF). Vanguard S&P 500 ETF (listed in NYSE) or iShares S&P 500 ETF (listed in LSE) are examples of funds linked to the S&P 500 composition (both stocks and their associated weightings).

As of 31 Mar 2020, S&P 500 market capitalisation was $21.42tn. And since the mega cap stocks have large market caps, nearly 75% of the S&P 500 index is made up of the largest 50 to 75 stocks. Here are the top 25 companies that constantly features in the S&P 500 index:

1. Microsoft (MSFT)

2. Apple (AAPL)

3. Amazon (AMZN)

4. Facebook (FB)

5. Berkshire Hathaway (BBRK.B)

6. Google / Alphabet (GOOGL / GOOG) - Google / Alphabet have Class A and Class C shares traded in the secondary market

7. Johnson & Johnson (JNJ)

8. JP Morgan & Chase (JPM)

9. VISA Inc (V)

10. Procter & Gamble Company (PG)

11. Mastercard Incorporated (MA)

12. Intel (INTC)

13. United Health group (UNH)

14. Bank of America (BAC)

15. AT&T (T)

16. Home Depot (HD)

17. Exxon Mobil (XOM)

18. Walt Disney Company (DIS)

19. Verizon (VZ)

20. Coca-Cola Company (KO)

21. Merck & Co (MRK)

22. Comcast Corp (CMSA)

23. Chevron (CVX)

24. PepsiCo (PEP)

25. Pfizer (PFE)