What Is the S&P 500 Growth Index?
The S&P 500 Growth Index is a stock index administered by Standard & Poor's-Dow Jones Indices. As its name suggests, the purpose of the index is to serve as a proxy for growth companies included in the S&P 500. The index identifies growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum.
This index may be compared with the S&P 500 Value Index.
- The S&P 500 Growth Index is a stock index that represents the fastest-growing companies in the S&P 500.
- It is currently heavily weighted toward prominent American technology companies.
- Investors wishing to invest in the index can do so using the iShares S&P 500 Growth ETF (IVW).
Understanding the S&P 500 Growth Index
The S&P 500 (formerly S&P 500/Citigroup) Growth Index is a market capitalization-weighted index, which means that the relative share of the index made up of specific securities is determined based on their share of the total market capitalization of the S&P 500. In simpler terms, larger companies make up a greater percentage of the index, while smaller ones represent a relatively small portion.
This simple fact can have fairly significant implications for investors. Particularly when looking at growth companies, the use of a capitalization-weighted methodology can cause the performance of the index to depend significantly on the performance of just a small portion of its member companies. In times when those companies continue to perform well, this dynamic will of course benefit those who are invested in the index, as the performance of the index will be “pulled upward” by those high-flying members.
Investors must remember, however, that this dynamic can also work in the opposite direction. If a group of companies that were previously doing exceptionally well suddenly begins to perform poorly, the index would be very vulnerable to any decline in their share price, since those companies would have come to represent a large portion of the overall index. Therefore, in extreme circumstances such as existed at the end of the dotcom bubble, indexes weighted by market capitalization could prove particularly vulnerable to this kind of decline.
Real-World Example of the S&P 500 Growth Index
With that in mind, it is not surprising to learn that the S&P 500/Citigroup Growth Index is comprised of some of the largest and fastest-growing companies in the S&P 500. In particular, the index is especially concentrated in some of America’s largest and most famous technology companies, such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), and Alphabet (GOOG). Collectively, these five companies alone represent roughly one-third of the entire index.
When deciding which companies to include, the index administrators review various quantitative factors, including the companies’ trailing 5-year growth rates in revenues and earnings per share (EPS). For those wishing to invest in the companies represented by this index, they can do so by using the iShares S&P 500 Growth exchange-traded fund (ETF), which operates under the ticker symbol IVW.