SP US Equity Indexes

ETFs benchmarked to the S&P 500 index are the most popular of all U.S. equity funds. More than $1 trillion is invested in S&P 500 products, including the assets in ETFs. There is more money invested in State Street's SPDR S&P 500 than most ETF companies have under management in aggregate.

All index providers have strengths and weaknesses, and the S&P is no exception. While there are strict rules for inclusion and deletion from S&P indexes, at the core of the process is a team of analysts that make the final decision as to which stocks go into the indexes, which come out, and when.

Although the S&P 500 is considered the most important benchmark for large companies, it is not the most complete. A popular misconception about the S&P 500 is that it contains only large companies. First, not all large cap stocks are in the S&P 500, and second, not all stocks in the index are large cap. About 10 percent are in mid cap companies. Actually, there is not a market capitalization limit for inclusion in the index. The guiding principle is that the company must be a leader in an important industry, regardless of its size.

It would seem as though the S&P 500 selection process is highly customized. However, under Index Strategy Box methodology, the S&P 500 is categorized as using passive security selection for three reasons; first, the large number of stocks sampled for in the index; second, the low turnover of stocks in the index; and third, the very high correlation of returns with competing large cap indexes.

The S&P 100 is a subset of the S&P 500 and is an important index followed by institutional investors. The S&P 100 is composed of large U.S. stocks that have exchange-listed options. Although there are only 100 securities, the index represents about 57 percent of the market capitalization of the S&P 500 and almost 45 percent of the entire market capitalization of the U.S. equity markets.

The S&P 400 Mid Cap Index and S&P 600 Small Cap Index are also managed using the same fundamental selection criteria and their big brother S&P 500. Both of those indexes are also categorized as passive selection under Index Strategy Box methodology for the same reason as the S&P 500 is.

Combining the S&P 500, the Mid Cap 400, and the Small Cap 600 indexes makes up the S&P SuperComposite 1500. The combined index represents about 85 percent of the total U.S. equity market capitalization.

To fill in the remaining 15 percent gap in the S&P index series, the S&P Total Market Index (TMI) was created. It includes all common equities listed on the NYSE, the AMEX, the NASDAQ, and the NASDAQ Small Cap exchanges. When the S&P 500 stocks are excluded from the TMI, the result is the S&P Completion Index. That index holds about 4,500 stocks.

S&P divides its 500, 400, and 600 indexes into two groups to create the S&P/Citigroup growth and value style indexes. The methodology employs a multifactor approach to decide value and growth. Three factors measure growth variables and four factors measure value components. Each stock is assigned a style score, and that score is used to assign a company to the value or growth index. The style series is divided by market capitalization so that each side has approximately the same value while limiting the number of stocks that overlap between them. The style series is exhaustive (that is, covering all stocks in the parent index universe) and uses a conventional free-float market capitalization weighting scheme.

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