Introduced in 1957, the Standard and Poors 500 Index is a market-capitalization-weighted index that helps investors assess the strength or weakness of about 500 of the most significant publicly traded companies in the U.S. Equity Markets. The Index is referred to as a market benchmark, with institutional and personal investments mirroring its ebbs and flows. According to S&P Dow Jones Indices, the index “represents more than 83% of the total domestic U.S. equity market capitalization,” and “while many of these companies may be household names, broad popular familiarity is not a requirement.” Eligibility for inclusion into the Standard and Poors 500 Index according to the S&P Dow Jones Indices are as follows-
- Should be a U.S. Company
- Minimum Market Capitalization of $11.8 billion
- Highly Liquid
- Public Float of 10% of outstanding shares
- Recent Quarter and Sum of Trailing Four Consecutive Quarters Earnings Must Be Positive
The Standard and Poors 500 Index is market-weighted, i.e., an index in which the components are ranked relative to its total market capitalization, where, “Market capitalization is the value of a corporation determined by multiplying the current public market price of one share of the corporation by the number of total outstanding shares.” Thus, market Capitalization serves as the conduit to explain the juggernaut of Apple Inc (NASDAQ: AAPL), and it being the most significant component in the Standard and Poors 500 Index. As of October 01, 2021, the Consumer Electronics Designer & Manufacturer registered a Market Capitalization of about $2.36 trillion, more significant than the Gross Domestic Product of South Korea, Mexico, and Australia. Consider the GDP by Country data from worldometers.info, where the combined GDP of countries such as Thailand, Norway, Israel, South Africa, Hong Kong, Denmark, and Bangladesh would register a value that parallels Apple Inc’s current Market Capitalization.
Fracturing the ecosystem into 11 Sectors Groups allows for granularity and perspective into the types of companies that comprise the Standard and Poors 500 Index. The 11 sectors are Real Estate, Energy, Consumer Discretionary, Financials, Industrials, Materials, Health Care, Information Technology, Communication Services, Utilities, and Consumer Staples. The following chart highlights the 11 Sector Groups in Increasing Market Capitalization.
In addition, 69 industry classifications are applied to classify further the various constituents of the Standard and Poors 500. Based on Market Capitalization, the top 20 publicly traded companies that are part of the Standard and Poors 500 Index are Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon.com (NASDAQ: AMZN), Google’s parent company Alphabet (NASDAQ: GOOG, GOOGL), Facebook (NASDAQ: FB), Berkshire Hathaway (NYSE: BRK.A, BRK.B), Tesla (NASDAQ: TSLA), Visa (NYSE: V), NVIDIA (NASDAQ: NVDA), JP Morgan Chase (NYSE: JPM), Johnson & Johnson (NYSE: JNJ), Walmart (NYSE: WMT), United Health Group (NYSE: UNH), Mastercard (NYSE: MA), PayPal (NASDAQ: PYPL), Home Depot (NYSE: HD), Proctor & Gamble (NYSE: PG), Bank of America (NYSE: BA), Walt Disney (NYSE: DIS), and Adobe (NASDAQ: ADBE). Visiting the Holdings page and clicking on the Daily tab of the S&P 500® ETF Trust (SPY) helps identify the other 480 companies that comprise the Standard and Poors 500 Index. Only five out of these twenty companies register a market capitalization of greater than $1.0 Trillion, with Facebook the latest entrant into the exclusive club. [I wrote about Facebook’s entry into the Trillion Dollar Club in-Antitrust Lawsuit Dismissed. Trillion Dollars Market Cap Achieved. But, can Facebook Always Be A Rabbit?]
The Oracle of Omaha, Mr. Warren Buffet, is consistently quoted as a strong proponent of investing in the Standard and Poors 500 Index. In his 2017 Annual Letter to Shareholders, Mr. Buffet shared findings of a financial experiment he conducted between 2008 and 2017. The experiment was as follows where Mr. Buffet invested in a “virtually cost-free” fund that tracked the Standard and Poors 500 Index. His counterparty Protégé Partners would pick five “funds-of-funds” to outperform the market. According to data shared by Mr. Buffet between 2008 and 2017, the Standard and Poors 500 Index fund handily beat all five Funds-of-Funds and gained 125.8% with an annual average gain of 8.5% compared to the only performer, the Funds-of-Funds C, which gained 87.7% with an average yearly growth of 6.5%. Mr. Buffet says, “Performance comes, Performance goes. Fees never falter.”
In a market littered with niche ETFs looking to offer exposure to a specific group of companies, the Standard and Poors 500 Index serves as a vehicle to gain entry and diversity at the same time without the hassle of picking specific stocks. Following the Index affords the individual an opportunity to opine about the share price of stocks listed in the U.S. Market and construct a narrative that supports their financial motivations to participate. The Standard and Poors 500 Index offers a canvas for the Financial Media to provide round-the-clock coverage since the health of U.S. equity markets are measured mainly against the Standard and Poors 500 Index. Click here to find a list of financial instruments that track the Standard and Poors 500 as shared by the S&P Dow Jones Indices, A Division of S&P Global.
Inspired by Mr. Buffet’s experiment, I wanted to find a cost-free fund that could help me invest in the Standard and Poors 500 Index. After some research and being a Fidelity customer, I was able to find the Fidelity ZERO Large Cap Index Fund (FNILX), a zero Expense Ratio Index Fund tracking the results of Large-Cap U.S. Companies. In September 2018, Fidelity announced the launch of the Fidelity ZERO Large Cap Index Fund (FNILX), alongside the Fidelity ZERO Extended Market Index Fund (FZIPX), a fund tracking the results of Mid-to-Small-Cap U.S. Companies. A quick review of the Fidelity ZERO Extended Market Index Fund (FZIPX) Monthly Fact Sheet suggests that much like the Standard and Poors 500 Index, Information Technology and Health Care represent the two major market sectors within the Fidelity ZERO Large Cap Index Fund (FNILX). Communication Services at 11.59% and Consumer Discretionary at 11.55% come three and four in the Fidelity ZERO Large Cap Index Fund (FNILX).
In contrast, Consumer Discretionary at 12.4% and Financials at 11.4% come three and four in the Standard and Poors 500 Index. Furthermore, using the SPDR® S&P 500® ETF Trust (SPY) as a proxy, one can understand that the Top 10 Holdings of the Standard and Poors 500 Index are reflected in the Fidelity ZERO Large Cap Index Fund (FNILX) with marginal weight differences. The following chart highlights the Top 10 Constituents of the SPDR® S&P 500® ETF Trust (SPY) and the Fidelity ZERO Large Cap Index Fund (FNILX), with SPY in Black and FNILX in Red.
Think of the Standard and Poors 500 Index as a Progress Dial, with the Top 10 constituents comprising 28.1% of the dial. In the case of the Fidelity ZERO Large Cap Index Fund (FNILX), the Top 10 would make up 27.4% of the dial. The following visual compares the Top 10 Holdings of the Fidelity ZERO Large Cap Index Fund (FNILX) against the Standard and Poors 500 Index using SPDR® S&P 500® ETF Trust (SPY) as a proxy.
Compared to an expense ratio of 0.095% on the SPDR® S&P 500® ETF Trust (SPY), to the 0.00% from the Fidelity ZERO Large Cap Index Fund (FNILX), the pyramid looks mighty attractive. Adding the fact that the Fidelity ZERO Large Cap Index Fund (FNILX) has no minimum price to entry helps invest effectively in the U.S. Large Cap companies, aka Standard and Poors 500 Index. I started participating in the Fidelity ZERO Large Cap Index Fund (FNILX) in Q3 20 through my Fidelity Roth IRA account.