The Standard & Poor’s (S&P) 500 index introduced in March 1957 is a market capitalization – weighted measure of 500 U.S. Large Cap companies.
S&P 500 is maintained by the Index Committee, a team of S&P Dow Jones Indices 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 ongoing basis. The Index Committee also monitors constituent liquidity to ensure efficient portfolio trading while keeping index turnover to a minimum.
The Criteria for Index Additions are listed as follows-
- Determining factors include location of the company’s assets and revenues, its corporate structure, its SEC filing type, and its exchange listings.
- The Market Capitalization of the company has to be more than USD 4 billion.
- There must be a Public Float of at least 50%.
- Companies should have four consecutive quarters of positive reported earnings and reported earnings are defined as GAAP Net Income excluding discontinued operations and extraordinary items.
- The ratio of annual dollar value traded to float adjusted market capitalization for the company should be 1.0 or greater.
- The company should trade a minimum of 250,000 shares in each of the six months leading up to the evaluation date.
- 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 within the defined market cap range.
- Company type includes all U.S. common equities listed on the NYSE (including NYSE Arca and NYSE Amex) and the NASDAQ stock market. REITs (excluding mortgage REITs) and business development companies (BDCs) are also eligible for inclusion.
The index is calculated using the Weighted Average Market Capitalization methodology where the price multiplied by the free float gives the market capitalization of its constituents. The base value of the index is 10 in the 1941-43 period. The weightage of each company is arrived at by dividing the market capitalization of each company with the total market capitalization of all the 500 companies. The larger the market weightage of the company the larger is the impact due to 1% change in its price on the index.
On any given day, the index value is the quotient of the total float-adjusted market capitalization of the index’s constituents and its divisor. Continuity in index values is maintained by adjusting the divisor for all changes in the constituents’ share capital after the base date. This includes additions and deletions to the index, rights issues, share buybacks and issuances, and spin-offs. The divisor’s time series is, in effect, a chronological summary of all changes affecting the base capital of the index. The divisor is adjusted such that the index value at an instant just prior to a change in base capital equals the index value at an instant immediately following that change.
Changes in the index is made on an as-needed basis. There is no annual or semi-annual reconstitution but it changes in response to the corporate actions and market developments. Constituent changes are typically announced one to five days before they are scheduled to be implemented.
Information Technology constitutes 18% followed by Financials at 15.9%, Health Care at 12.5%, Consumer Discretionary at 11.6%, Consumer Staples at 11%, , Energy at 10.9%, Industrials at 10.1%, Utilities at 3.5%, Materials at 3.4% and Telecommunications at 3% for the sector allocation in the index.
The S&P 500 has given a return of 16.7% on a year on year basis and has declined 2.32% on a month on month basis. The index reached an all-time high of 1897.28 on 4th April 2014. The index has a Price to Earnings ratio of 18.12 in the current scenario. The S&P 500 along with the DAX, Nasdaq and the Dow is one of the best performing equity indices over the last one year. Apple Incorporation company has the highest weightage of 2.97% in the index followed by Exxon Mobil with a weightage of 2.89%, General Electric with 1.72%, Chevron Corporation with 1.65%, Johnson and Johnson at 1.63% and IBM at 1.6% while others have less than 1.6% weightage each in the index.
