Want a stake in companies like Apple, Microsoft, IBM, Netflix, Johnson & Johnson, GE, Facebook, Google, McDonalds, Walt Disney, Coca Cola, Citibank and more? The S&P 500 is your answer as it comprises of 500 of the United States’s largest listed companies. The value of these companies cross over $20 trillion with a combined profit of $1 trillion. In this post, we look at what is the index, it’s history, companies that form part of it, historical index prices, PE ratio and a lot more
What is the S&P 500 Index?
The S&P 500 is a stock market index that comprises the stock market performance of 500 of the largest companies on the stock exchanges in the United States of America. It is quite simply, the most commonly followed equity index as it represents companies that are the biggest drivers of the economy. The S&P 500 Index is often treated as the barometer to judge the performance of the United States economy.
The S&P 500 was introduced by Standard & Poor’s in 1957. The Index was opened on March 4, 1957. And over these years, the index has averaged annual total return (including dividends) of 9.8%. So, if your grandfather had put in a mere $100 in the S&P 500 Index during its inception, your corpus today would have swelled to $36,891 today.
Seems good. What else?
A hugely popular Index, the S&P 500 has been recommended by the likes of John C. Bogle (who created Index funds in the 1970s) and Warren Buffett (the most popular investor in the world & often counted in the world’s top 10 richest people). These great investors have tipped investment in the S&P 500 as an extremely good long term investing option for the everyday investor.
The Index is maintained by S&P Dow Jones Indices and its constituents are selected by a committee.
Key Features & Importance of S&P 500 Index
The key features of the S&P 500 Index are –
- Has a very long track record of 63 years
- Consists of bluechip stocks which are the leading 500 companies in the United States.
- Acts as the gauge of the economy & often used to forecast the economic direction of the largest economy of the world. The United States has a GDP of $20.5 trillion and has 23.8% of the world GDP
- Offers global exposure as over 40% of sales from companies in the S&P 500 Index were reported from foreign countries
- Forms the base for the largest Index Funds as the top 4 passive funds in the world track the S&P 500 Index
- Trusted by investors like Warren Buffett and John Bogle who have recommended for everyday investors to invest in S&P 500 Index funds
Let’s look at the S&P 500 companies
S&P 500 List of Companies
The S&P 500 consists of the world’s top brands. These include household names like Google, Amazon, Apple, Facebook, Coca Cola, McDonald’s, Citibank, VISA, Cadbury, Starbucks Coffee etc.
Most of these brands are available all around the world in over a hundred countries. Moreso, over 40% of the sales of these brands happens outside the United States making them truly multinational.
When you buy into the S&P 500 Index through a mutual fund or index fund or ETF, you get a stake into the companies that own these brands. As these companies grow, so does your corpus.
The S&P 500 list of companies is quite long.
Oh yes, did I mention it? 500 companies 🙂
These are the top 10 companies in the S&P 500 Index:
|4||Facebook Inc. Class A||FB||1.802786|
|5||Berkshire Hathaway Inc. Class B||BRK.B||1.649800|
|6||Alphabet Inc. Class A||GOOGL||1.598095|
|7||Alphabet Inc. Class C||GOOG||1.592512|
|8||Johnson & Johnson||JNJ||1.527802|
|9||JPMorgan Chase & Co.||JPM||1.412088|
|10||Visa Inc. Class A||V||1.326508|
Click for a complete list of S&P 500 companies with index weights
S&P 500 Index is a capitalization-weighted index. This means companies with a larger market capitalization have a larger proportion of the Index.
At the time of writing this article, Microsoft Corporation held the largest weight in the Index at 5.462200. At second position was Apple Inc. having a weight of 4.950748. Thus, just these two companies comprise over 10% of the Index. The top 10 companies constituted a combined weight of 23.73% of the Index.
Here’s a little history about the S&P 500.
As we said earlier, the S&P 500 was born on March 4, 1957. The S&P 500 then tracked 425 industrial companies, 15 rail and 60 utility stocks. The largest company then was AT&T (American Telephone & Telegraph) which had a market capitalization of $11.2 billion. Now, this company has over $215 billion but outside the top 10.
So, do these companies stick for long?
Over the past 60 years, the S&P 500’s constituents have changed dramatically. On it’s 50th anniversary in 2007, S&P published a list of the companies that stay from the original line-up. There were just 86 companies which shows an attrition of 83%. Move forward to 2020 and that 86 has dipped further to just 60.
S&P 500 Historical Prices and Returns
The below table exhibits the index value for every year since 1957 and the year-on-year growth in the index value.
|Year||Index Value||Change %|
* As on 27 March 2020
As we can see in the S&P 500 Index chart, the growth has been quite phenomenal over the years and is probably the reason why top investors have promoted this Index as perhaps one of the best instruments for growing long-term wealth.
In addition to the S&P 500 growth trajectory, it is commendable that the S&P 500 has had very few negative years. Infact, since 1957, the Index has seen just 19 negative years out of 63 years. That means, in 70% occasions, the S&P 500 has seen a positive year.
S&P 500 Price Earning Multiple
The current S&P 500 PE Ratio is 19.12.
The PE Ratio of the S&P 500 Index is the total market capitalization of the 500 stocks that constitute the Index and dividing it by the combined profits (or earnings) of these stocks.
To reverse engineer, the total market capitalization of the S&P 500 companies is $19.7 trillion at the time of writing this article. With a PE Ratio of 19.12, the total annual profit of the companies comprising the S&P Index comes to a little over $1 trillion.
S&P 500 PE Ratio Chart
Investing in a S&P 500 Index Fund for Indian Investors
A few people have asked me this question.
Does it make sense for me to invest in the S&P 500 Index?
Yes. Why not?
Here are some points in support of that –
- The US stock markets and Indian stock markets have very low correlation which means you can effectively diversify your portfolio thereby lowering the risk
- There is no evidence to suggest that the US economy – the world’s largest economy – is going to weaken. We are all consumers of US brands from Amazon to Facebook to McDonalds. This isn’t going away soon which means, consumers all over the world will be adding to the profits of these companies
- Indian investors get a dollar hedge. Let me explain with an example
You invest ₹7,000 in the S&P 500 Index. At today’s USD:INR conversion of 1:70, you have invested $100 in the S&P 500 Index.
Now fast forward 10 years and the S&P 500 Index has doubled. So your $100 is now $200. But at the same time, USD:INR conversion has gone up to 1:100. This means, in INR terms, you now have ₹20,000 (i.e. $200 * ₹100). In other words, you have made a higher appreciation in capital due to the foreign currency differential.
Additional Resources You Might Like
- Complete SIP Investment Guide (over 8000 words compedium updated until 2020)
- Six benefits of term insurance plans
- The trillion dollar index fund story that John Bogle started in the 1970s
- Best SIP for achieving long term goals
- 5 steps on choosing the right term insurance plan