The S&P 500 Index: Are We All The Blind?

“The Blind Men and the Elephant is a parable from India that has been adapted by many religions and published in various stories for adults and children. It is about a group of blind men who attempt to learn what an elephant is, each touching a different part, and disagreeing on their findings. Their collective wisdom leads to the truth. (From “Short Stories for Children”)

Introduction

“The parable of the blind men and an elephant is a story of a group of blind men who have never come across an elephant before and who learn and imagine what the elephant is like by touching it. Each blind man feels a different part of the elephant's body, but only one part, such as the side or the tusk. They then describe the elephant based on their limited experience and their descriptions of the elephant are different from each other. In some versions, they come to suspect that the other person is dishonest and they come to blows. The moral of the parable is that humans have a tendency to claim absolute truth based on their limited, subjective experience as they ignore other people's limited, subjective experiences which may be equally true.”

(From “Blind men and an Elephant” in Wikipedia, the italics are emphases.)

The Focus

I and my readers are not blind, but Buddha said clearly leaders and monks are not different from the blind men before the King.

Leaders (or our investors) monks (or our religious people) have the same prejudice which the simple blind men have, by insisting their finding is right but all others' finding is wrong.

As an investor based upon Top-To-Bottom Approach for my entire investment career, I have not analyzed any single security or any ETF, including SPY.

After inviting SPY as the key component in the Dual Control System, established a few days ago, I have to scrutinize the S&P 500 Index (SPY) as broadly and deeply as possible.

Here, we have an Elephant, naming SPY (the S&P 500 Index).

For this urgent task, What and how can I proceed?

The article focuses on answering the question.

The Touch # 1: “The Impact of the Global Economy on the S&P 500”, S&P Dow Jones, A Division of S&P 500 Global.

The shares of the S&P 500 Revenues of U.S. and all other countries were 71% and 29%, respectively, and the major countries' shares were: 1) China 4.3%, 2) Japan 2.6%, 3) U.K. 2.5%, 4) Canada 2.1%, 5) Germany 1.9%, 6) France 1.1%, and 7) Brazil 1.0% at the end of 2017.

Two revenue models and 12 sectors performances were reported.

The Touch # 2: “The S&P 500: The Index You Need to Know”, By Greg McFarlane, Updated June 21, 2023

If you had to use a single financial barometer to indicate the strength of the economy, what would it be? The S&P 500 is paramount among indexes and the daily de facto numerical indicator of the U.S. economy.

KEY TAKEAWAYS

The S&P 500 is an equity index made up of 500 of the largest companies traded on either the NYSE, Nasdaq, or CBOE.

The S&P 500 is calculated by adding each company's float-adjusted market capitalization.

In order to be included in the S&P 500, a company must meet certain requirements, including achieving a specific market cap (at least $12.7 billion), having a majority of its shares in public hands, and being a public company for at least a year.

Investors who want to invest in the S&P 500 index can purchase an index fund or exchange-traded fund that seeks to match the performance of the S&P 500.

How the S&P 500 Works

First, the etymology of the term: S&P stands for Standard and Poor’s. Henry Poor was a 19th-century financial analyst who compiled an annual book that listed publicly held railroad companies. His publication merged with those of the Standard Statistics Company in 1941. And 500 is the number of stocks that comprise the index.

That’s it. The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on the New York Stock Exchange (NYSE), Nasdaq, or Chicago Board Options Exchange (CBOE). Like popes and Oscar winners, the components of the S&P 500 are selected by a committee. And, like the College of Cardinals and the Academy of Motion Picture Arts & Sciences, the S&P 500 committee operates within specific criteria. To qualify for the index, a company must have:

A market cap of a certain size

The value of its market capitalization trade annually

At least a quarter-million of its shares trade in each of the previous six months

Most of its shares in the public’s hands

Had its initial public offering (IPO) at least one year earlier

Have a positive sum of the previous four quarters of earnings, as well as the most recent quarter

Between them, the NYSE, Nasdaq, and CBOE list several thousand companies. But the first criterion alone reduces that number to less than a thousand. Add a few more benchmarks, and it’s easy to see how the S&P can get down to 500 large-cap stocks suitable for inclusion.

$12.7 billion

The minimum market cap a company must have to be included in the S&P 500 index.

How the S&P 500 Is Calculated

Unlike the Dow, which you calculate by just adding up the prices of the component stocks and multiplying by a constant, the S&P 500 is more complex. Instead of adding the constituents' stock prices, the S&P 500 adds the companies’ float adjusted capitalization.

Float-adjusted means counting only the shares available to the public, excluding those held by management, governments, and other companies. There are hundreds of ostensibly publicly-traded companies that keep most of their shares in house.

Stocks Removed From the S&P 500

With so many components and such stringent criteria, the S&P 500 is dynamic. S&P Dow Jones Indices, the subsidiary of S&P Global that determines the components of the index, has little patience for slackers.

Case in point: United States Steel (X), one of the stalwarts of the 20th-century industry, was listed on the S&P 500 since its inception. In fact, at one point, the company was the largest company in the world. When it fell below the $4 billion threshold in 2013, the index gave it the boot and made room for Martin Marietta Materials (MLM), a construction aggregate producer.

Only on Wall Street does the Iron Age give way to the Stone Age.

The S&P 500's most recent rebalancing was announced on March 10, 2023, and took effect before markets opened on March 15, 2023. SVB Financial Group was removed from the S&P 500 Index due to the failure of its bank, Silicon Valley Bank. The Federal Deposit Insurance Corporation (FDIC) took the group into receivership, making it ineligible for inclusion into the index. It was replaced with Insulet Corp. Similarly, Signature Bank was taken into FDIC Receivership and was removed from the index and replaced with Bunge Ltd.

But even technologically adept companies have to meet the S&P 500’s list of requirements. Turnover in the S&P 500 has been lower than you might think, but the length of time companies stay on the list is shrinking.

According to a study by McKinsey, the average lifespan of a company on the S&P 500 was 61 years in 1958. As of 2021, it was 16 years. The study also states that by 2027, 75% of the companies currently listed on the index will disappear.

Sometimes a company buys a company it replaces on the index or spins off a large chunk of itself. Other companies leave the list when they can no longer reach the market cap requirement. Typically, when that happens, the company is relegated to the index from which its replacement was promoted.

Is there a survivorship bias here? Sure, but there’s also a survivorship bias in the economy at large. The remaining stocks flourish by virtue of remaining. One study even claims that over the decades, stocks removed from the S&P 500 have ended up outperforming their replacements.

Who Keeps Track of the S&P 500 Constituents?

The S&P Dow Jones Indices, a subsidiary of S&P Global determines which companies get added to the index. It sets the requirements and monitors the constituents' adherence to those requirements.

How Does a Company Get Added to the S&P 500?

To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least $12.7 billion, be highly liquid, and have a public float of at least 10% of its shares outstanding. The company must also be profitable in its most recent quarter’s earnings, and the sum of its trailing four consecutive quarters’ earnings must be positive.

Does the S&P 500 include Nasdaq Stocks?

Yes, the S&P 500 is composed of 500 of the largest companies traded on the NYSE, Nasdaq, and CBOE.

What Are the 10 Biggest Stocks in the S&P 500?

The 10 largest components of S&P 500, as of May 31, 2023, include:

Apple (AAPL)

Microsoft (MSFT)

Amazon (AMZN)

Nvidia (NVDA)

Alphabet Class A (GOOGL)

Alphabet Class C (GOOG)

Meta Class A (META)

Berkshire Hathaway Class B (BRK.B)

Tesla (TSLA)

UnitedHealth Group (UNH)

Can You Just Invest in the S&P 500?

If you want to invest in the S&P 500 as a whole, you don't need to purchase all 500 stocks individually. Several index funds and exchange traded funds (ETFs) are available to investors. These Funds are designed to track the performance of the S&P 500 index.

The Bottom Line

For the most part, the S&P 500 doesn’t convey information that differs drastically from comparable indices (or vice versa). It broadly matches the more exclusive Dow and the more inclusive Russel 2000.

Even so, the S&P 500 represents a happy medium of sorts: comprehensive enough to indicate the relative strength or weakness of the larger economy, but not so exhaustive as to include too much noise with the signal. Overall, the S&P 500 is the index of indices—the bellwether adopted by analysts, policymakers, and ordinary market participants alike

The Touch #3: “Top S&P 500 Index Funs”, by Matthew Johnston, updated on Feb. 15, 2023 Investopedia

Most Liquid S&P 500 Index Fund: SPDR S&P 500 ETF

SPY is an ETF, not a mutual fund, and it's not even the lowest-cost S&P 500 ETF. It is, however, the most liquid S&P 500 fund. Liquidity indicates how easy it will be to trade an ETF, with higher liquidity generally meaning lower trading costs. Trading costs are not a big concern to people who want to hold ETFs long-term, but if you’re interested in trading ETFs frequently, then it’s important to look for high-liquidity funds to minimize trading costs.

Expense Ratio: 0.09%

2022 Return: 18.14%%

Yield: 1.56%

AUM: $382.1 billion

Minimum Investment: $464.68

Inception Date: Jan. 22, 1993

Issuing Company: State Street

Summary

My touching the Elephant is done.

Remembering the parable at the beginning, I, nevertheless, claim only my finding is "true" because so many better sources may be missing.