S&P 500 Index: The benchmark of benchmarks in the U.S. 

What is the S&P 500 Index?

The S&P 500 index, or Standard & Poor’s 500 index is a stock market index which tracks the performance of 500 of the most successful and large publicly-traded companies within the U.S. Within the U.S. Globally, it is one of the most widely followed stock indices, and is largely used as a proxy for the overall “market” within the U.S. When the S&P 500 is increasing, the general market sentiment is that U.S. stocks are doing well, and conversely, when the S&P 500 is decreasing like it is now, the sentiment is that the U.S. stock market is weak.

The S&P 500 index is a free-float market-capitalization-weighted index, meaning that the most valuable companies make up a larger proportion of the index. The S&P 500 index is based on some of the largest companies and therefore reflects the performance of large companies and underrepresents the performance of smaller companies (e.g., small, and mid-cap companies). 

The index captures many sectors within the U.S. market, although some are represented more than others.

Sector weights of the S&P 500 (as of of May 31, 2022)

• Information Technology (27.1%)
• Health Care (14.4%)
• Financials (11.2%)
• Consumer Discretionary (10.9%)
• Communications Services (8.8%)
• Industrials (7.8%)
• Consumer Staples (6.5%)
• Energy (4.8%)
• Utilities (3.0%)
• Materials (2.8%)
• Real Estate (2.8%)

The individual companies are added and removed quarterly based on the criteria set out. This criterion includes, but is not limited to:

1. Market capitalization requirements
2. Liquidity requirements
3. Public float requirements
4. Profitability requirements

Importance of the S&P 500

As mentioned, the S&P 500 index is used as a proxy for the overall U.S stock market. Since share prices reflect forward expectations of companies, the S&P 500 is used as a leading indicator for the performance of U.S. companies and the overall U.S. economy.

The S&P 500 index is also used as an index for investors. Some index funds replicate the performance of the S&P 500, and investors can gain access to the performance of the S&P 500 through lower-cost products such as exchange-traded funds (ETFs). Furthermore, it is common for active investors to attempt to outperform the S&P 500, and it is a widely used benchmark for active investors.

Ways to get exposure to the S&P 500 Index

As mentioned, many passive investors have created substantial wealth and saved a lot of time through simply investing in S&P 500 ETFs. They are able to invest in the top 500 companies within the U.S., and the constituents of the index are automatically updated every quarter.

These ETFs are very low-cost and extremely liquid as well, making them ideal candidates for passive investors.

IVV (iShares Core S&P 500 ETF)

AUM: $278B

Expense Ratio: 0.03%

YTD performance: -20.4%

VOO (Vanguard S&P 500 ETF)

AUM: $766B 

Expense Ratio: 0.03%

YTD performance: -20.4%

SPY (SPDR S&P 500 ETF Trust)

AUM: $347B 

Expense Ratio: 0.09%

YTD performance: -20.4%

Data for this article is as of June 22nd, 2022.