Menu &


The Outsiders

| April 16, 2024

Which stocks are in the indexes you hear about on the financial news every night?

Perhaps the more interesting question is which stocks are NOT in the index. Let’s look at an example:

The S&P 500 is one of the most widely watched benchmarks of the world’s biggest stock market. It measures the 500 largest US stocks, right? Actually, wrong.

As at the end of February this year, 73 of the companies ranked in to top 500 listed US firms by market value were actually excluded from the S&P 500.

In fact, the combined market value of these stocks that don’t get past the bouncer at the index door is just over $US2 trillion.

To put that in perspective for people in this part of the world, that’s 20% more than the entire market value of companies listed on the Australian and New Zealand stock exchanges put together.1

Why do companies get left out of the index? It’s because the index providers, in this case S&P, set a litany of eligibility requirements.

The investment committee of the S&P 500 then actively selects which stocks to include and when to include them.

For example, by the time Tesla was added to the S&P 500 it was the sixth-largest company in the S&P 500. This isn’t a one off, other household names like Airbnb, Lululemon and Uber were all in the US’s largest 500 stocks for months before finally being added to the index.

So what’s the lesson here?

Indexes are just a representation of the market. They’re not the market itself.

The benchmarks are a result of a series of decisions that don’t always prioritise risk and return for investors.

In other words, there’s more investing opportunity out there than you see on the news every night.

EXHIBIT 1

What’s Not In the S&P 500 Index?

 

Largest 500 US-listed securities by market cap as of 29 February, 2024
Illustrated bar chart showing three categories: largest 500 US securities by market cap, the largest companies that are not in the S&P 500 Index, and the Australian and New Zealand stock market. The first bar shows how many of the top 500 by market cap are in the S&P 500: 427. The second bar shows how many of the top 500 by market cap are not in the S&P and their total value: 73 and $2.1 trillion. The third bar shows the value of the Australian and New Zealand stock market: $1.73 trillion.

Footnotes

1 Market capitalisation of Australian and New Zealand stocks in the MSCI All Country World IMI as at 29 February, 2024. MSCI data © MSCI 2024, all rights reserved.

Disclosures

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

Risks
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

Australia

This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that have been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.