- The S&P 500 is considered an essential benchmark index for the US stock market.
- Composed of 500 large-cap companies across a breadth of industry sectors, the index captures the pulse of the America’s corporate economy.
- Limited to just large-caps the index misses the the mid and small-cap stocks that make up most of economy. That fall to the Russell 2000.
- As a market-cap weighted index, this benchmark also gives huge weight to the largest companies, which makes up most of the index.
The Standard & Poor’s 500 Index is the most commonly used benchmark for determining the state of the overall economy. Many investors also use the S&P 500 as a benchmark for their individual portfolios.
The DJIA used to be the main gauge of economic health for the United States, but that index only contains 30 companies and is limited in the sectors it represents.
The S&P 500 has become the leading stock index due to its broader scope. Many hedge funds compare their annual performance to the S&P 500.
The Key advantage of using the S&P 500 as a benchmark is the wide market breadth of the large-cap companies included in the index. The index can provide a broad view of the economic health of the United States.
In addition to its broad scope, another advantage of the S&P 500 is that components of the index are updated Quarterly. A committee determines which companies to include in the index. The factors considered include a market capitalization in excess of $6.1-B, a public float of at least 50% HQs in the US, adequate liquidity and financial viability.
Companies must have traded for 6 to 12 months after their IPOs (initial public offerings) before being considered for inclusion in the index. By updating the index components, the index can accurately reflect the state of the large-cap market.
Have a healthy weekend, Keep the Faith!