Summary: What is the S&P 500?
The Standard and Poor’s 500 (more commonly known as the S&P 500) is a stock market index that tracks the performance of 500 large companies listed on U.S. based stock exchanges. The S&P 500 is by far one of the most commonly recognized and followed indexes.
What Companies are Included?
The S&P 500 includes companies across 11 sectors to offer a picture of the health of the U.S. stock market and the broader economy. To be eligible to be included in the S&P 500, companies must meet the following criteria:
- Have a market capitalization of at least $8.2 billion
- Be based in the U.S.
- Be structured as a corporation and offer common stock
- Be listed on an eligible U.S. exchange
- Have positive as-reported earnings over the most recent quarter (in addition to the four recent quarters when added together)
There are other factors as well, but these are the main considerations. Because of this strict criteria, only the most prominent and stable U.S. companies can be included in the S&P 500, which is one of the reasons many investors flock to this index – for its strength and diversification. The list of the companies included in the S&P 500 is reviewed and updated quarterly.
What does the S&P 500 Measure?
As noted, the S&P 500 tracks the market capitalization of the roughly 500 companies included in the index, measuring the value of the stock of those companies. In case you’re not familiar, market capitalization is calculated by multiplying the number of shares a company has outstanding by its current stock price (for example, if a company has 1 million shares currently held by its shareholders and the share price is $5, the company’s market cap would be $5 million).
The value of the S&P is calculated based on the market cap of each company that’s included and it’s adjusted to consider the number of shares that are traded publicly. The companies that are included are given a specific weighting in the S&P 500 based on the company’s individual market capitalization divided by the S&P 500’s total market capitalization. This means that companies with larger market caps are weighted more heavily than companies with smaller market caps.
Can I Invest in the S&P 500?
Yes! Although you can’t buy just the S&P 500, you can purchase index funds that track the S&P 500. When you invest in an index fund that tracks the S&P 500, you’re investing in the same holdings of that specific index which means that you’re diversified amongst the companies that it holds.
Consistently investing in the S&P 500 is one of the best ways to get started in investing and it’s also one of the most cited methods for buildings long-term wealth through a diversified portfolio. Two examples of index funds that track the S&P 500 include VFV & VOO (VFV is Canadian and VOO is its U.S. counterpart. Click here to learn more about VFV & VOO).
What is the Average Return of the S&P 500?
Since its inception in 1957, the S&P 500 has had an average annual total return of approximately 10%, which includes dividend yield as well (not adjusted for inflation). Although this sounds great and has been lucrative for investors, this does not mean that it was a linear 10% per year. Rather, there are years where the S&P 500 has been down and others were it has rallied significantly. Short term there will be ups and downs, but over the long term the S&P 500 has been a consistent “up and to the right” investment.
Understanding that there will be short term turbulence at times (think the market crash of 2008…) is important for investors as investing in the S&P requires a long term horizon and a willingness to accept market volatility. There will be corrections, bear markets and so on, so it’s important to remain principled and think long term (depending on your investment horizon, of course!).