Warren Buffet has famously said to bet on America and buy index funds. He also said, “for most people, the best thing to do is to own the S&P 500 index fund.” Since the best advice for most people is to buy and hold index funds, I figured it would be good to explain and provide detail about the most popular index, the S&P 500.
The S&P 500 index was created back in 1957 by Standard & Poor’s. The index intends to track the value of the largest 500 companies on the New York Stock Exchange and the NASDAQ Composite.
History of S&P 500 Index
- 1860 – Henry Poor founded Poor’s Publishing Company. His company published the history of the Railroads and Canals of the United States to help investors understand the emerging railroad industry.
- 1896 – A reporter named Charles Dow creates the Dow Jones Industrial Average to demonstrate the investment potential of the stock market as well as show market trends.
- (I mention the Dow Jones Index for two reasons: 1st to compare to S&P500 and second S&P now manages the Dow today too.)
- 1941 – Standard Statistics Co. and Poor’s Publishing Co. Merge creating the Standard & poor’s company we know today.
- 1957 –The S&P 500 index is launched. The other notable milestone is the S&P 500 becomes the first computer-generated stock index.
- 1966 – McGraw-Hill acquires Standard & Poor’s
- 1973 – Wells Fargo & American Nation Bank launch the first investment fund tracking the S&P 500
- 1976 – Vanguard Group launches the retail-focused S&P 500 mutual fund
- 1993 – Exchange-Traded Funds (ETFs) are created in the U.S. The very first ETF was the Standard & Poor’s Depositary Receipts (SPDRs), which tracks the S&P 500.
As mentioned above in the S&P 500 history, the index consists of 500 large-cap US stocks, but how do companies become part of the index. To join the S&P 500, the following criteria must be met:
- It must be a U.S. company.
- It must have at least $8.2 billion in market cap.
- It must also have at least 50% of the outstanding shares be public float.
- It must be profitable in its most recent quarterly report as well as have demonstrated profit over its previous four quarters shown in its last 10-K annual report.
- The stock must also trade for a reasonable share price.
If a company meets these criteria, does that mean it is included in the index? NO! There is a committee that manages the rebalancing and modification of the index quarterly, but it has been quoted saying, “Turnover in index membership should be avoided when possible.”
The index committee is a governance group comprised of nine members who meet once a month to discuss changes to the index. A company must be voted into the index by a majority vote from the committee.
How Many Companies?
Even though it is the S&P 500, there are 506 companies currently in the index. So why are there more than 500, well it’s because some companies are listed twice? There are some companies, particularly tech companies, which have multiple share classes.
Facebook & Berkshire were grandfathered into the index before a rule change that occurred in 2017. Companies like Alphabet, Discovery, Fox, News Corp, and Under Armour are examples of companies that are named twice in the index because of having multiple share classes.
Effects of Membership
Once a company meets the requirements and is approved by the committee, the company will frequently see its stock rise. The reason a stock increases is that the funds such as mutual funds or ETFs will then purchase the stock in their portfolio.
Members of the S&P 500 Index
If you want to see the full breakdown of the S&P 500 check out this site.
As of May 1, 2020, the breakdown of the sectors in the S&P 500 is as follows:
- Information technology: 25.7%
- Health care: 15.4%
- Communications: 10.8%
- Financials: 10.6%
- Consumer discretionary: 10.5%
- Industrials: 7.9%
- Consumer staples: 7.4%
- Utilities: 3.3%
- Energy: 3%
- Real estate: 2.9%
- Materials: 2.5%
Top S&P 500 Index Funds
- Fidelity 500 Index Fund (FXAIX)
- Schwab S&P 500 Index Fund (SWPPX)
- Vanguard 500 Index Fund Investor Shares (VFINX)
- State Street S&P 500 Index Fund Class N (SVSPX)
- SPDR S&P 500 ETF (SPY)
This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.