The S&P 500 (SNPINDEX: ^GSPC) is one of the most popular market benchmarks in the investing world. Trillions of dollars gets invested using the S&P 500 as the yardstick for measuring performance. Yet there are some things that many people don't know about the venerable index. Below, we'll reveal three facts that very few investors know about the S&P 500.
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1. The bottom 100 stocks in the S&P 500 have almost no influence on the index.
The S&P 500 is an index that is weighted by market capitalization. That means that the largest companies have the most influence on the index, and when those large components have particularly strong or weak performance, then their moves will often be apparent in the movement of the broader index itself. Yet the flip side of that coin is that many of the index's roughly 500 component stocks have almost no influence on the index as a whole.
For instance, when you look at the 100 smallest stocks in the S&P 500, their weights range from 0.007% to 0.048%, and their total weighting is a bit more than 3%. By comparison, Apple has a weight of between 3% and 3.5% in the S&P 500, making it just as important as the mass movement of those 100 smaller stocks. If you want broader-based exposure to the smaller end of the large-cap spectrum, then going with an equal-weight version of the S&P 500 is vital.
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2. The S&P 500 is a favorite among frequent traders.
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The S&P 500 is a suitable investment for long-term investors, but it also gets a lot of attention from traders. Indeed, the amount of trading on the S&P 500 shows just how short-term-minded many market participants are.
To show this, let's look more closely at trading activity on the S&P 500. ETF investors in the SPDR S&P 500 (NYSEMKT: SPY) alone trade an average of 77 million shares each day, working out to more than $18 billion in daily volume. That means that the SPDR ETF turns over its entire share base every 12 trading days. With plenty of other ways to trade the S&P 500, including other exchange-traded funds, mutual funds, and futures contracts, the index's liquidity is unparalleled.
3. Turnover in the S&P 500 is fairly high
It's an achievement for a company to become part of the S&P 500, but the pace at which the index changes its list of constituents is somewhat higher than many people expect from such a well-respected and much-followed benchmark. In 2016, nearly 30 companies joined the S&P 500 for the first time. That followed a similar total of more than 25 in 2015.
Mergers and acquisitions are the most common reason why the S&P 500 makes changes to the index, because when two companies that are already in the S&P 500 combine, the merger opens up a spot that the index needs to fill. However, sometimes, stocks shrink to the point at which they are no longer appropriate for the S&P 500 to include. At that time, the methodology that the index follows has procedures for coming up with a replacement company.
Keep your eyes on the S&P 500
The S&P 500 gets a lot of attention from investors because it has become the standard by which investment performance gets measured. Being aware of the S&P 500 and how it is performing is vital in order to determine whether your returns in your stock portfolio are keeping up. At the same time, though, knowing these facts about the S&P 500 will put the index into the proper perspective and let you focus on what really matters to you: producing the returns that you need in your portfolio to reach your financial goals.
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