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 (SPX).
Created By: Standard and Poor's Index Services
Number of Companies: 500
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.
Selection Criteria: 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.
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
capitalization 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
(Spyders) is the Exchange-Traded Fund (ETF) that
tracks the S&P 500.
