The Outsiders

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

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.

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