Let’s get a few things straight about the S&P 500. First, it’s a market-cap weighted index of large-cap companies based in the U.S. A company’s market cap is calculated by multiplying its shares outstanding by its stock price. The bigger the company’s market-cap the bigger its influence on the direction of the S&P 500. Imagine Apple or Amazon as the 800-pound gorillas and you get an idea of how the index works.
How is it constructed? The S&P 500 is not a collection of the largest 500 companies by market cap in the U.S. It is constructed and managed by a committee. Part of the committee’s task is determining which companies should be in the S&P 500.
The S&P 500 might be the largest actively managed fund in the world, with over $2 trillion tracking it, never mind the close to $8 trillion using it as a benchmark.
The active selection of the S&P 500 companies are chosen from the S&P 1000, which, as it should be, is an index of the largest 1000 U.S. companies by market cap. Are you with me?
The committee, led by economist David Blitzer, has guidelines to follow. But it doesn’t have to follow a rule book per se like the S&P 1000. I bring this up because it’s worth considering that the S&P 500 might be more of a “managed” index than investors realize. And what good is a benchmark if it is run by human emotions and not rules?
