Updated: May 25
Provided by Robert Warther, Warther Private Wealth
History of the S&P 500
In 1999, Standard & Poor alongside Morgan Stanley Capital International developed the GICS, or the Global Industry Classification Standard. The GICS is used to sort publicly traded companies into different sectors based on the primary function of the business. The GICS is then used to create indexes, which provide insight into global or country specific economies. There are many types of indexes, but they are often based off the capitalization or sector exposure of companies. These indexes are usually market or price weighted, meaning every stock in the index is represented in the index proportionally to its total market weight.
One of the most well-known indexes, the S&P 500, represents the top 500 companies in the U.S. This index on average represents about 80% of total value in the U.S. stock market, meaning that this index is a good indicator as to how the U.S. market is performing. Another well known index is the Dow Jones Industrial Average, often referred to simply as the Dow. The Dow represents 30 of the most large and influential companies in the U.S. This index is typically known for its listing of the best blue-chip companies with consistent dividends but should not be used as a representation of the whole market. The final index I will mention is the Nasdaq Composite Index, which includes all stocks traded on the Nasdaq exchange. This index is a little different than those previously mentioned because some of the companies in the index are not based in the U.S. This index is known to be tech heavy, including software, biotech, semiconductors and more, but because it includes all stocks from the Nasdaq exchange, it also contains many small and/or speculative companies. The Nasdaq Composite Index is considered a good indicator on the performance of the technology industry, as well as how investors feel about more speculative stocks.
Sector breakdown of the S&P 500 allows for investors and portfolio managers to create diversified portfolios that contains stocks from different sectors of the market. It also allows for investors to easily target sectors that they may be more interested in! The following list is a basic breakdown of the 11 sectors of the S&P 500, with the largest sectors being at the top of the list.
- Information Technology
This sector includes companies that develop and distribute technological items or services, such are internet or computer companies. This is one of the fastest growing sectors and includes companies such as Microsoft Corp, Apple Inc and Cisco Systems Inc.
The healthcare sector contains medical supply and pharmaceutical companies, as well as any other company that aims to improve human health and well being. Companies such as Johnson & Johnson, Pfizer Inc and Abiomed Inc are all included in this sector. The healthcare sector is growing quickly due to the current Covid-19 pandemic as well as the legalization of Cannabis in some states.
The financial sector includes any company involved in finance, investing and the movement and storage of money, such as banks and insurance companies. Many companies in this sector are well established, such as Bank of America Corp, JPMorgan Chase & Co and American Express.
- Consumer Discretionary
This sector contains companies that produce or sell items and services that are not necessary for survival, such as Cars or Jewelry. There are many well known companies in this sector, such as Amazon, Nike and Starbucks.
- Communication Services
This sector is built up of companies that help keep people in contact with each other. It also includes media and entertainment companies. Some examples of companies included in this sector are Netflix, Walt Disney, AT&T and Facebook.
This sector contains a wide range of companies, including airlines, railroad companies and weapon manufacturers. Notable companies in this sector include Boeing, Lockheed Martin, 3M and Fedex.
- Consumer Staples
This sector is almost the opposite of consumer discretionary: It contains companies that provide life necessities. Examples include companies that produce food, household products and personal products. Coca Cola, Clorox, Wal Mart and General Mills are all included in this sector.
Any company that is engaged in the exploration, refining and marketing of oil, gas, coal and other consumable fuels is included in the energy sector. Well known companies such as Chevron Corp, Exxon Mobil and Kinder Morgan are included in the energy sector.
The Utilities sector includes companies that provide or generate electricity, gas and water to buildings or households. A lot of utility companies are currently developing more renewable energy sources, such as solar or wind power. Companies such as Dominion Energy, FirstEnergy and NextEra Energy are included in this sector. NextEra Energy is the worlds largest producer of wind and solar power.
- Real Estate
The real estate sector is self-explanatory, containing Real Estate Investment Trusts as well as realtors. The real estate sector only accounts for about 2.9% of the S&P 500 and includes companies such as American Tower Corp and the CBRE Group.
Companies that manufacturer and sell materials such as chemicals, construction materials, wood and metals are included in the materials sector. Notable companies in the materials sector include Sherwin Williams, Ecolab and Avery Dennison.
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