The S&P500 index and ETFs
NOTE! The information is based on November 2021 data
Considered to be a proxy of the U.S. equity market, the index is composed of 500 constituent companies.
The Standards and Poor’s 500 (S&P500) is one of the seminal indices of the world today. The index measures the performance of the large-cap segment of the market. It is one of the most tracked indices in the world.
Indices have historically been designed to measure market performance in specific countries, industries or sectors. In the last 30 years, however, ETFs and unit trusts have been created to track the performance passively, with buy and sell orders only when the constituents of the index change.
Weighting, indices and market cap
If know all the big words, skip to the next section! If not, then let’s look at some of the terminologies here.
- Index – An index is an indicator or measure. In the case discussed, it measures a basket of shares that adhere to the rules of the index.
- Market cap – Market capitalization is the market value of publicly-traded company shares that can be bought on the stock exchange.
- Large-cap – companies are typically divided according to market capitalization: large-cap ($10 billion or more), mid-cap ($2 billion to $10 billion), and small-cap ($300 million to $2 billion).
- Constituent – A constituent is a company whose shares are part of an index
- Float-adjusted – when an index is float-adjusted, it means all outstanding shares that are not publicly traded on the stock market are excluded from their calculations.
Weighting
Weighting has to do with what percentage a given company has in the index.
For example, some indices give every stock the same weighting: there are 100 constituents and each has a 1% weighting. But what if one of the companies is by far bigger than the other companies? Surely it will not be fair?
Market Cap Index
This is why we have market cap weighting. Each constituent’s percentage of this weighting is dependent on their total market capitalization.
Price-Weighted Index
Some indices, such as the Dow Jones industrial is a price-weighted index. The price per share determines what influence they have on the index. This is determined by adding the constituents’ stock prices together and then dividing it by the total number of stocks. The stocks with a higher value will have more influence on the index.
What type of weighting does the S&P500 have?
The S&P500 index is weighted by float-adjusted market capitalization.
S&P Basic rules
There are seven rules that determine whether or not entry to the index is permissible. As with all things in life, there is always fine print – but generally, the rules below cover most of the index rules. These points are taken from the S&P500 Wikipedia page:
- Market capitalization must be greater than or equal to US$13.1 billion
- The annual dollar value traded to float-adjusted market capitalization is greater than 1.0
- The minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date
- The (eligible) constituent must be publicly listed on either the New York Stock Exchange (including NYSE Arca or NYSE American) or NASDAQ (NASDAQ Global Select Market, NASDAQ Select Market or the NASDAQ Capital Market).
- The company should be from the U.S.
- Securities that are ineligible for inclusion in the index are limited partnerships, master limited partnerships and their investment trust units, OTC Bulletin Board issues, closed-end funds, exchange-traded funds, Exchange-traded notes, royalty trusts, tracking stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, American depositary receipts, and American depositary shares.
- Since 2017, companies with dual share classes are not added to the index.
Note that REITs are also eligible.
Rebalancing frequency
The S&P500 are rebalanced quarterly in March, June, September and December.
Though the index would be more current and up to date with more regular rebalancing, the total expense ratio of the ETFs and unit trusts tracking the index would be affected. For this reason, it makes sense that the index is not updated daily.
Interesting facts of the S&P500
The S&P500 is a broad market index, meaning that it covers a lot of sectors, businesses and industries. The biggest sector in the S&P500 is information technology, with the four biggest players being Apple, Microsoft, Amazon, Alphabet and Facebook.
- As of November 2021, 71% of S&P 500 revenues come from the US, while the remaining comes from foreign markets. As the index rebalances, this percentage changes.
- Historical dividend yields for the S&P 500 have typically ranged from between 3% to 5%.
Past performance
We know that past performance doesn’t indicate future performance, but it’s still useful to understand what the index did historically. Note that the statistics below exclude fees that your fund/ETF, broker or platform would charge.
Here are some key statistics on the S&P500 from 1970:
- Total annualised return including dividends:
- High: 37.58 %
- Low: – 37.00 %
- Average: 15.06 %
- Annual change in Index:
- High: 34.11 %
- Low: −38.49%
- Average: 12.31%
This is the annual returns since 1930. Source here.
The S&P500 closing price levels since 1957. Source here.
Issues and concerns
In October 2021, a study claimed that some companies purchase ratings from S&P Global Inc. to increase their chance of entering the S&P 500 Index. Though S&P Global noted that the research is flawed, we know that similar situations have happened with Morninstar.
When an index rebalances, we know that ETFs and unit trusts that track this index will issue buy and sell orders. This means that the inclusion of a company in the S&P500 could inflate the price of the stock.
ETFs tracking the S&P500 in South Africa
All funds tracking an index do exactly the same thing. For this reason, the only real concern is the fees involved. For more info on fees, check out this article here.
The providers below are available on EasyEquities. You can also speak to your broker!
Fund / Fund provider
TIC
Sygnia ITRIX S&P 500 (SYG500)
0.16%
Satrix S&P 500 Feeder ETF (STX500)
0.25% (incl. VAT)
1nvest S&P500 Index Feeder ETF – Previously STANLIB S&P500 Index Feeder ETF (ETF500)
0.33%
CoreShares S&P500 ETF (CSP500)
0.39%
Conclusion
The S&P500 index is a large-cap index that is weighted by float-adjusted market capitalization. This means that some companies will have a bigger share in the index. At the moment, there is a 30% exposure to technology, with the biggest constituents being Google, Microsoft, Amazon and Facebook. Being an all market index, it covers a variety of industries and sectors in the US economy.
There is a variety of ETFs that you can choose from to invest in these top 500 companies.
Happy investing!
Sources consulted
- S&P Global – S&P U.S. Indices
Methodology - Investopia – Total stock funds
- Investopia – Market Capitalization
- S&P Global – The Impact of the Global
Economy on the S&P 500®