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The Truth Behind the S&P 500

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Image used under license from Shutterstock.com

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?

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com