The Standard & Poor's 500 Index
The main drawback of the DJIA is that it only contains 30 companies. The S&P 500 improves on the DJIA in this respect by including 500 companies. More and more, it is seen as the benchmark of the U.S. stock market . In fact, the performance of most equity managers is pegged against the S&P 500.
| Created By: |
Standard and Poor's Index Services |
| Number of Companies: |
500 |
| Types of Companies: |
The S&P 500 tries to cover all major areas of the U.S. economy. It is not the 500 largest companies, but rather the 500 most widely held companies--chosen with respect to market size, liquidity , and industrial sector. |
| Selection Criteria: |
Components are chosen by the S&P Index Committee. Anywhere from 25-50 changes are made every year because of mergers or fallouts à la Enron. International companies have been included in the past, but only U.S. companies will be added in the future. |
| How it's Calculated: |
The S&P 500 is a market capitalization- weighted index. This means every stock in the index is represented in proportion to its market capitalization. |
Advantages: The S&P 500 is one of the best benchmarks in the world for large cap stocks. By including 500 companies, it offers great diversification and accounts for around 70% of the U.S. market. The performance of the S&P 500 is considered one of the best overall indicators of market performance and a mutual fund manager's goal is to beat it.
Disadvantages: The top 45 companies comprise more than 50% of the index's value. Additionally there's very little foreign content, and no small or mid-cap growth.
Investing: The S&P 500 has several index funds that track it, most notably Vanguard's. Standard & Poor's Depository Receipts (SPY) is the Exchange-Traded Fund (ETF) that tracks the S&P 500.
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