Index Investing: The Standard & Poor's 500 Index
The main drawback of the DJIA is that it only contains 30 companies. The S&P 500 improves on the DJIA in this respect by including 500 companies. It is increasingly seen as the benchmark of the U.S. stock market. In fact, the performance of most equity managers is pegged against the S&P 500.
||Standard and Poor\'s Index Services
|Number of Companies:
|Types of Companies:
||The S&P 500 tries to cover all major areas of the U.S. economy. It is not the 500 largest companies, but rather the 500 most widely held companies - chosen with respect to market size, liquidity and industrial sector.
||Components are chosen by the S&P Index Committee. Anywhere from 25-50 changes are made every year because of mergers or fallouts à la Enron. International companies have been included in the past, but only U.S. companies will be added in the future.
|How it\'s Calculated:
||The S&P 500 is a market capitalization-weighted index. This means every stock in the index is represented in proportion to its market capitalization.
Index Investing: The Nasdaq Composite Index
|Advantages: The S&P 500 is one of the best benchmarks in the world for large cap stocks. By including 500 companies, it offers great diversification and accounts for approximately 70% of the U.S. market. The performance of the S&P 500 is considered one of the best overall indicators of market performance and a mutual fund manager\'s goal is to beat it.
|Disadvantages: The top 45 companies comprise more than 50% of the index\'s value. Another disadvantage is that there\'s very little foreign content.
|Investing: The S&P 500 has several index funds that track it, most notably Vanguard\'s Standard & Poor\'s Depository Receipts (spiders) is the Exchange-Traded Fund (ETF) that tracks the S&P 500.