The index Standard & Poor’s 500 is the most commonly used test to determine the state of the economy as a whole. Many investors also use S&P 500 as a benchmark for their individual portfolios.
Industrial index Dow Jones-the main indicator of the economic health of the United States, but this index only contains 30 companies and companies in the industry which he represents. The S&P 500 index and became the leading stock index in connection with its broader scope. Many hedge funds to compare their annual performance of the S&P 500 and seeks to realize an alpha in excess and returns the index.
The advantages of using the S&P 500 index as a benchmark
The main advantage of using the S&P 500 index as a benchmark is the broad breadth of the market in large capitalization companies included in the index. The index can provide a broad perspective on the economic health of the United States.
In addition to the wide coverage, another advantage of the S&P 500 index is that index components are updated on a quarterly basis. The Committee determines which companies are included in the index. The factors considered include market capitalization in excess of $6.1 billion, a free float not less than 50 percent, with headquarters in the United States, sufficient liquidity and financial stability.
Companies have to trade within six to 12 months after their initial public offering (IPO) before being considered for inclusion in the index. When updating the index components, the index can accurately reflect the condition of large capitalization.
Disadvantages of using S&P 500 index as a benchmark
There are also some disadvantages of using the S&P 500 index as a benchmark for individual work portfolio. Most investors are widely diversified in assets, except reserves, such as bonds, precious metals and monetary values that are not reflected in the s&P 500.
In addition, the index contains only large market capitalization companies from the United States. In contrast, investors can hold small capitalization or foreign companies in their portfolios. Using the S&P 500 as a benchmark may not be accurate assessment of portfolio profitability for the individual investor.
Another disadvantage of the use of the S&P 500 index for the base purposes is that the index is disproportionately biased towards larger companies. The top 50 companies by market capitalization account for more than half of the index. As a result, these 50 companies have a greater impact on the index. The price spikes in major companies have undue influence on the overall index.
The S&P 500 index and uses a weighted market capitalization of its construction. The index takes the number of shares multiplied by the current market price of the shares to determine the market capitalization of each company. All market capitalizations are summed and then divided by the number known as the divisor of the index. As a result, the calculation of the index.