S&P 500

Good ETF Proxy: SPY: S&P 500 ETF

The S&P 500 has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index has over US$ 3.5 trillion benchmarked, with index assets comprising approximately US$ 915 billion of this total. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities.

The S&P 500 Index does not contain the 500 largest stocks, not are all the stocks in the index US-based corporations. For example, Warren Buffett's Berkshire Hathaway, which S&P considers a holding company, is not in the S&P 500 Index. On the other hand, the S&P 500 Index has a few firms that are quite small, representing companies that have fallen in value and have yet to be replaced. As of March 2007, the total value of all S&P 500 companies was about $12.7 trillion, but this constituted less than 75 percent of the value of all stocks traded in the US, significantly less than 50 years ago when the index comprised almost 90 percent of the market.

Stocks for the Long Run by Jeremy Siegel

S&P 500 index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. S&P 500 is part of a series of S&P U.S. indices that can be used as building blocks for portfolio construction.

S&P 500 is maintained by the S&P Index Committee, a team of Standard & Poor's economists and index analysts, who meet on a regular basis. The goal of the Index Committee is to ensure that the S&P 500 remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large cap universe on an on-going basis. The Index Committee also monitors constituent liquidity to ensure efficient portfolio trading while keeping index turnover to a minimum.

Index Methodology

The S&P Index Committee follows a set of published guidelines for maintaining the index. Complete details of these guidelines, including the criteria for index additions and removals, policy statements, and research papers are available on the Web site at www.indices.standardandpoors.com. These guidelines provide the transparency required and fairness needed to enable investors to replicate the index and achieve the same performance as the S&P 500.

Criteria for Index Additions

  • U.S. Company. Determining factors include location of the company's operations, its corporate structure, its accounting standards and its exchange listings.
  • Market Capitalization. Companies with market cap in excess of US$ 3 billion. This minimum is reviewed from time to time to ensure consistency with market conditions.
  • Public Float. There must be public float of at least 50%.
  • Financial Viability. Companies should have four consecutive quarters of positive as-reported earnings, where as-reported earnings are defined as GAAP Net Income excluding discontinued operations and extraordinary items.
  • Adequate Liquidity and Reasonable Price. The ratio of annual dollar value traded to market capitalization for the company should be 0.30 or greater. Very low stock prices can affect a stock's liquidity.
  • Sector Representation. Companies' industry classifications contribute to the maintenance of a sector balance that is in line with the sector composition of the universe of eligible companies with market cap in excess of US$ 3 billion.
  • Company Type. Constituents must be operating companies. Closed-end funds, holding companies, partnerships, investment vehicles and royalty trusts are not eligible. Equity Real Estate Investment Trusts (REITs) and business development companies (BDCs) are eligible for inclusion. Continued index membership is not necessarily subject to these guidelines. The Index Committee strives to minimize unnecessary turnover in index membership and each removal is determined on a case-by-case basis.

Criteria for Index Removals

  • Companies that substantially violate one or more of the criteria for index inclusion.
  • Companies involved in merger, acquisition, or significant restructuring such that they no longer meet the inclusion criteria.
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