What Is the S&P 500?
The S&P 500 is an index that is widely used as a proxy for the U.S. stock market. The index tracks the health of companies whose outstanding shares total more than $9.8 billion. Shares of these companies are referred to as large-cap stocks, and the companies that issue them are the largest companies in the United States. Investors and experts use the S&P 500 to track values of the largest stocks across multiple industries.
How Does the S&P 500 Work?
According to the U.S. Securities and Exchange Commission, “In a market-cap-weighted index, securities with a higher market capitalization value account for a greater share of the overall value of the index.”
Market capitalization, or market cap, refers to the cumulative value of a company’s shares. It is determined by multiplying a company’s outstanding shares by its stock price.
This differs from “price-weighted” indexes, such as the Dow Jones Industrial Average, which bases the weight of a security on its price per share.
Determining the S&P Value of a Company
The S&P value of a company is found by dividing its market capitalization by the total market cap.
The S&P 500 is considered a float-adjusted index that reflects the value of shares available to the public, excluding those held by government agencies or other control groups.
Although the S&P 500’s fluctuations can make it challenging to predict, experts can use past trends and data to make educated projections when establishing interest or return rates.
Which Companies Make Up the S&P 500?
Currently 505 stocks among 500 companies — some with more than one share class — make up the S&P 500.
- Be a publicly traded U.S. company
- Have a $9.8 billion or higher market capitalization
- Be highly liquid
- Have a public float of outstanding shares totaling at least 10 percent
- Have positive earnings from its most recent quarter
- Have positive earnings from its trailing four quarter period (the immediately preceding four-quarter period)
S&P 500 companies must trade on public markets and disclose financial performance information to the public. These constituents submit periodic reports to the SEC for financial transparency to shareholders.
- Apple Inc.
- Microsoft Corp.
- Amazon.com Inc.
- Facebook Inc. Class A
- Tesla Inc.
- Alphabet Inc. Class A (Parent company of Google)
- Alphabet Inc. Class C (Parent company of Google)
- Berkshire Hathaway Class B
- Johnson & Johnson
- JP Morgan Chase & Co.
The index includes a myriad of industries, from technology to healthcare and beyond, exhibiting a wider, inclusive reach when compared with related indexes.
How Does the S&P 500 Compare to Other Indexes?
Other stock market indexes use alternative methods to gauge the health of the U.S. economy.
Since 1896, the Dow Jones Industrial Average has tracked the 30 leading U.S. companies in their respective industries. The Dow is weighted by stock prices, which means a company’s share price influences its DJIA percentage weight.
Because the Dow is price weighted, smaller companies can have a greater influence on the index, and the index can be more volatile.
Russell US Indexes
Established in 1984, FTSE Russell refers to the Russell US Indexes as “the leading US equity benchmarks for institutional investors.”
The Russell US Indexes include the large cap Russell 1000 and the small cap Russell 2000, among others. Russell US Indexes use what it calls “an objective, rules-based formula for determining which companies become components of the large and small cap indexes.”
The S&P 500 and Russell 1000 had comparable annual risk and return profiles reported between 1993 and 2019, 9.65% and 9.73% per year.
How Do Annuities and Investment Funds Leverage the S&P 500?
If you are saving for retirement, depending on the makeup of your financial portfolio, the S&P 500 is likely to affect your returns — whether directly or indirectly. You can invest directly by buying company shares, or you may have a retirement plan, annuity, mutual fund or other financial product whose returns are affected by this stock index.
Exchange Traded Funds
Exchange traded funds, or ETFs, are liquid investments that trade on a daily basis and track the S&P 500. These funds can be a combination of commodities and assets, and their success correlates with the index’s performance. Exchange traded funds trade like individual stocks, so they can be bought and sold throughout the trading day.
Index funds, unlike ETFs, can be traded only at the end of each trading day. Index funds track a stock index’s returns as they invest in some or all of the securities in the S&P 500, Russell 2000 or other indexes. Index funds are intended to passively maximize returns over a long period of time, rather than actively buying and selling.
If you have an indexed annuity, you are not directly invested in the market. Your contract may offer premium protection, limited upside potential and a guaranteed minimum return — a security net of sorts. These insurance products are not as volatile as ETFs and index funds, and they don’t offer the same potential for higher gains.
Annuity types vary in terms of risk and return. Equity-indexed annuities, also called EIAs or indexed annuities, use the S&P 500, or another index, as a benchmark for interest crediting.
Compared with a fixed annuity, an indexed annuity has potential for a higher return when the S&P 500’s performance is favorable.
Saving and Planning: The Other S&P
Although there are a lot of moving parts, you can benefit from the other S&P — saving and planning.
Do you know how much money you need to save to retire comfortably at the age of 65? The S&P 500 performance is likely to be a factor in your calculations, and your number of remaining years in the workforce can impact the rate of return projections. Age, life expectancy, spending habits, types of investments, assets and inflation are other factors that should inform your planning.
Building financial literacy can help you make smart decisions as you pursue your savings and retirement goals. Whether retirement is quickly approaching or in the distant future, you should pay attention to market fluctuations and their potential short- and long-term implications for your finances.
10 Cited Research Articles
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