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The
S&P 500 Composite Stock Price Index is a
market-value-weighted index (shares outstanding multiplied by
stock price) of 500 stocks that are traded on the New York Stock
Exchange (NYSE), American Stock Exchange (AMEX), and the Nasdaq
National Market System (NASDAQ). The weightings make each
company's influence on the Index's performance directly
proportional to that company's market value. It is this
characteristic that has made the S&P 500 Index the investment
industry's standard for measuring the performance of actual
portfolios.
Unlike other lists of
companies, the ones selected for the S&P 500 are not chosen
because they are the largest companies in terms of market value,
sales, or profits. Rather, the companies chosen for inclusion in
the Index tend to be the leading companies in leading industries
within the U.S. economy. That is why in 1968 the Index became a
component of the U.S. Department of Commerce's Index of Leading
Economic Indicators. Now published by the Conference Board as
the Composite Index of Leading Indicators, that widely followed
index is used to signal potential turning points in the U.S.
economy.
S&P 500
Index History
The origins of the S&P 500 Index go back to 1923, when Standard
& Poor's introduced a series of indexes that included 233
companies that were grouped into 26 industries. Since then,
Standard & Poor's has expanded its coverage over the years; in
July 1996, following introduction of a new, comprehensive
industry group classification system for all securities in the
S&P Stock Guide Database, there were 105 specific industry
groups in 11 economic sectors represented in the S&P 500. Four
major industry sectors have also been developed: Industrials,
Utilities, Financials, and Transportation. The number of
companies in each major industry sector has been allowed to
float since 1988 in order to enable the Standard & Poor's Index
Committee to react efficiently to an increasingly dynamic
economy and stock market.
"Over the years, the
S&P 500 has really become the index to beat for most investors,"
according to Roger Fenningdorf, director of U.S. equity research
at the Rogers Casey pension-fund consulting firm. "In the world
of professional money management, we've all become fixated on
how well managers do relative to the S&P."
The use of the S&P 500
as the proxy for the overall stock market predates the
widespread adoption of the Capital Asset Pricing Model (CAPM) in
the 1970s. As the amount of money invested in the equity markets
grew in the 1950s and 1960s, the need for a
capitalization-weighted, broad-based market indicator that
reflected how people actually invest in equities became
self-evident. By convention, the S&P 500 Index, already
well-known to academics and to professional money managers, was
used as the market portfolio in tests of the CAPM. Betas of
individual stocks were then calculated against the S&P 500
Index, which by definition had a portfolio beta of 1.00.
These days, it is
difficult to find an equity manager who cannot tell you how its
portfolio's performance compares with the S&P 500. Some
companies, such as Fidelity, even make a portion of their
management fees contingent on whether their funds outperform the
S&P 500. In the Magellan Fund's case, its fee is raised or
lowered by 0.20 percent of assets, depending upon how it fares against
the S&P 500's total return over a rolling three-year period.
However, it is no
longer possible for an investment management firm simply to
claim that it beat the S&P 500. The adoption of performance
presentation standards by the Association for Investment
Management and Research (AIMR) and their inclusion as of January
1, 1993, as Standard III F of the AIMR Standards of Professional
Conduct, has focused attention on the need for properly defined
and utilized investment benchmarks. The firm must use a
benchmark that parallels the risk or investment style the
client's portfolio is expected to track.
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SPDRs
Signals
Past 3 Months |
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6%
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11%
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Compound |
Compound
Margin |
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As of 5/11/2008 |
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