What if you could invest in the best and forget about the rest? You can.

December 9, 2024

Do you want to invest in the best companies in the U.S. and forget about the rest? 

It's easy. Buy shares of low cost exchange traded funds (ETFs) that track the performance of the S&P 500. Three of these ETFs are the Vanguard's "VOO"; iShares "IVV", and State Street's "SPDR".

What is the S&P 500?

The Standard & Poor's 500 Index (S&P 500) is a stock market index (list) designed to measure the weighted performance of the best 500 publicly traded companies in the United States.

S&P 500 Timeline and Milestones:

• 1923: Standard Statistics Company introduced the first stock market index, a precursor to the S&P 500. It tracked 233 U.S. companies across various industries.
• 1941: Standard Statistics merged with Poor's Publishing, forming Standard & Poor's Corporation.
• 1957: The modern S&P 500 was launched. It was the first stock market index to be calculated using a computer, enabling real-time updates.
• 1976: The first mutual fund tied to the S&P 500 was introduced by Vanguard, marking the beginning of index-based investing.

Composition of the S&P 500:

By definition, the S&P 500 includes 500 companies. There are 503 stocks because three companies (Alphabet, Fox, and News Corp) issue two classes of stock each. The performance of the S&P 500 is weighted by the market capitalization of each company listed. That means that companies with higher market capitalization have a more significant influence on the index’s performance. 

Unlike the Dow Jones Industrial Average (30 stocks) and the NASDAQ Composite (focused on tech stocks), the S&P 500 is diversified, and more representative of overall economic conditions. The S&P 500 composition is revised quarterly, reflecting shifts in the economy, market trends, and corporate dynamics. 

Criteria for Inclusion

To be considered for inclusion in the S&P 500, a company must meet the following criteria:

• Based in the United States.
• Publicly traded (e.g. NYSE or NASDAQ).
• Market capitalization of at least $18 billion (as of December 2024)
• Positive earnings over the last four quarters.
• Liquidity with sufficient trading volume.

The 11 Sectors of the S&P 500

The S&P 500 companies are divided into 11 sectors based on the Global Industry Classification Standard (GICS):

1. Information Technology
2. Health Care
3. Financials
4. Consumer Discretionary
5. Industrials
6. Consumer Staples
7. Energy
8. Utilities
9. Materials
10. Real Estate
11. Communication Services

The first 9 sectors above were created in 1999. Real Estate was added in 2016. Communication Services was added in 2018.

The S&P 500 is considered a leading indicator of the U.S. economy and is often used as a benchmark for global financial markets. Since it is composed of the best 500 companies in the U.S., the S7P 500 tracks the health of the overall U.S. economy very well. 

Past Performance

Over the last century, the S&P 500 has delivered an average annualized return of around 9-10% (including dividends). The index has recovered from major crises, including the Great Depression, World Wars, the 2008 Financial Crisis, and the COVID-19 pandemic. Past performance, of course, is not a guarantee of future performance. The future has not been created yet. 

This is how the 11 different sectors have performed in the past 10 years. 

• Information Technology: ~67 companies. This sector includes firms involved in software, hardware, and semiconductor industries such as Apple, Microsoft, and NVIDIA. This sector has been the top S&P 500 performer, driven by rapid technological advancements and the growth of major tech companies. Annualized rate of return for the last 10 years: ~20%.

• Consumer Discretionary: ~52 companies in retail, automotive, and other consumer-focused services such as Amazon.com Inc., Tesla Inc., and The Home Depot. Benefiting from increased consumer spending and inflation, this sector has been the second best performer. Annualized rate of return for the last 10 years: ~13%.

• Financials: ~71 companies like banks, insurance companies, and investing companies such as JPMorgan Chase & Co., Bank of America, and Berkshire Hathaway. Knowing the ins and outs of money making and management, these companies tend to do well financially over time. Annualized rate of return for the last 10 years:~12%

• Industrials: ~78 companies in manufacturing, aerospace, and construction such as General Electric, Union Pacific Corporation, and Honeywell International. This sector tends to require ample capital, which operates as an entry barrier and leads to good profits. Annualized rate of return for the last 10 years: ~12%.

• Utilities: ~31 providers of essential services like electricity and water such as NextEra Energy, Duke Energy Corporation, Southern Company. Like industrials and materials, the utility sector is also characterized by high entry barriers and relative less competition safeguarding a good financial performance year over year. Annualized rate of return for the last 10 years:~10%.

• Health Care: ~63 companies in the pharmaceutical, biotechnology, and medical devices industries such as UnitedHealth Group, Johnson & Johnson, Pfizer Inc. Advancements in medical technology and pharmaceuticals together with an aging population have contributed to solid performance in this sector. Annualized rate of return for the last 10 years:~10%.

• Communication Services: ~22 companies in telecommunication and media such as table companies: Alphabet Inc. (Google), Meta Platforms, and Disney. Established in 2018, this is the newest sector in the S&P 500. This sector was established to recognize new technological trends in media and telecommunications. Annualized rate of return for the last 10 years: ~9%.

• Materials: ~28 companies in mining, chemicals, and forestry like Linde plc, Dow Inc., Newmont Corporation. Like industrials, this sector tends to require large amounts of capital and has good entry barriers protecting the companies from competition and safeguarding performance. Annualized rate of return for the last 10 years:~9%.

• Consumer Staples: ~38 companies producing mostly essential consumable goods such as food, beverages, and household products such as Procter & Gamble, Coca-Cola Company, and PepsiCo. The strong economy has led to very good performance in this sector. Annualized rate of return for the last 10 years: ~8%.

• Real Estate: ~31 real estate investment trusts (REITs) and other real estate firms such as Prologis, American Tower Corporation, and Simon Property Group. Real estate has its ups and downs, but tends to appreciate over time and either beat or keep up with inflation. Annualized rate of return for the last 10 years:~7%.

• Energy: ~22 companies in oil, gas, and renewable energy like Exxon Mobil Corporation, Chevron Corporation, ConocoPhillips. Affected by fluctuating oil prices and shifts toward renewable energy, this sector has had the second lowest performance in the S&P 500. Annualized return for the last 10 years: ~ 6%.

These figures are approximate and can change over time due to market dynamics and reclassifications within the index. 

S&P 500 Composition Updates

The S&P 500 is updated as the performance of companies change over time (e.g. quarterly). For example, in the most recent quarterly shuffle, it was decided that these two companies Workday (WDAY) and Apollo Global Management (APO) will replace Qorvo (QRVO) and Amentum Holdings (AMTM) before the bell on Monday, Dec. 23. The latter two stocks will drop down to the S&P SmallCap 600 index.

Now you know a little bit more about the famous S&P 500. By investing in ETFs that track the S&P 500 (e.g. VOO, IVV, and SPDR), you are indirectly investing in the best 500 companies in the U.S. Since its inception, the index has returned approximately 9% in average every year. Past results are not indicative of future performance. This means that in the years to come, the S&P can perform better, worse, or the same. No one knows. The future has not been created yet. To be sure, in creating your future, you should consider today whether or not in makes sense to you to invest in ETFs that track the S&P 500. 

Creatix is a commercial information matrix. A matrix is a place or platform where things are created. To create is to transform. Creatix transforms general information into commercial intelligence. 

On the web at www.creatix.one