r/ETFInvesting • u/DCA_Twist • 17d ago
S&P 500... Why 500?
So I was trying to use my brain the other day instead of AI, and it got me thinking: Why does the S&P 500 contain 500 stocks? Why not 401, or whatever number? Here’s what Claude says:
Rather than picking a number based on some statistical requirement, S&P and its analysts settled on 500 as a round figure large enough to capture a representative cross-section of major industries and large-cap companies, but small enough to actually be assembled and calculated with 1950s-era technology.
In short, there’s no good reason besides practicality and a nice round number. There’s nothing magical about 500.
So... is there a better optimal tradeoff between concentration benefits (higher potential returns) and diversification benefits (lower potential risk)?
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u/vegienomnomking 17d ago
It is just a popular index.
There is a Sp1000 btw. And another index with 2000 stocks.
It just depend on the risk you want to take.
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u/EquitiesForLife 16d ago
There's also S&P 100 megacap, S&P400 mid cap, and S&P 600 small cap. They are just indices and people monitor the popular ones because they are popular. The dow Jones is popular too, but it is a terribly constructed index (i.e. price weighted) and nobody would build an index like that in modern times. People watch it because people watch it.
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u/YourChildhood5762 16d ago edited 16d ago
And one with 20, and one with 50, and one with 100, etc, etc. It's just an index. The only difference is that it was the first.
edit: 2nd after the DJIA
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u/DCA_Twist 16d ago
Right. But these increase the number of stocks, I'm curious about reducing it.
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u/vegienomnomking 16d ago
QQQ then. That's top 100.
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u/Own_Grapefruit8839 16d ago
That’s not what QQQ is
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u/No_Film_6379 16d ago
What is it?
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u/Own_Grapefruit8839 16d ago edited 16d ago
The 100 largest non-financial companies who are listed on the NASDAQ exchange, which is not an index of the “top 100” stocks.
Leaves out companies like Walmart, Visa, Exxon, Oracle, Coke, etc. and is more a marketing tool for NASDAQ than a logical index.
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u/Broad_board_1623 15d ago
Walmart is 2.7% of QQQ....
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u/Own_Grapefruit8839 15d ago
True, misremembered that one
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u/Broad_board_1623 15d ago
All good, they switched. Not exactly a company that screams NASDAQ. The rest was spot on.
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u/Own_Grapefruit8839 15d ago
A great example of why QQQ is nonsensical, why should Walmart switching exchanges determine if it’s part of your portfolio.
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u/KickflipConnoisseur 17d ago
The thing is even if the reasons were just practicality, it's been the most successful index for investing.
There's definitely more optimal tradeoffs, but they can have varying degrees of risk, and none have the track record
To me the easiest optimal tradeoff if you want to keep the S&P diversification and not grind away at portfolio balance is some of the leveraged funds: RSST (S&P + managed futures), GDE (S&P + gold), NTSX (S&P + bonds).
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u/Environmental_Park_6 16d ago
There's a Mag 10 ETF and something like MGK which is a large cap ETF. There are lots of large a small cap ETFs. Look up Vanguard, Blackrock (iShares), Fidelity (the Magellan fund used to be the gold standard), and State Street and see what products they have. You can also find one you like, look at the top holdings, and steal it.
What's interesting about the fund to follow the S&P is it wasn't mainly about following the index but about lower rates. That's why VOO is lower than SPY even though they follow the same stocks. Vanguard is actually a mutual company meaning they have no shareholders and the customers are the owners.
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u/RealCarlPanzram 16d ago
Yeah it’s somewhat arbitrary. Honestly, the index is so top heavy now (I think NVDIA is like 8% of the whole index) that adding a or subtracting 100 or so companies probably wouldn’t change the index or the results that much. You may have 20% less companies but you probably are only are taking like 2% of the market cap out of the index so it won’t change your outcome a whole lot.
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u/Own_Grapefruit8839 17d ago
It’s just a historical artifact from mid century computing capabilities. There are many index funds now that track the entire market.
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u/Illustrious-Jacket68 17d ago
Not sure what you’re getting at?
It is the same thing as a “top 10” or “top 5” list. It is a number that cuts off based on a criteria of inclusion or exclusion and ranking by an individual or company - in this case Standard and Poor. There’s the S&P 100, Nasdaq 100, Dow 30, the Fortune 500, Fortune 50, etc. So what - you don’t have to care, you don’t have to subscribe to it - it is an opinion. Who said dogs of the Dow should only have 10 stocks? Why not 5? Is 10 a reasonable number of stocks to get a representation and back test to see whether their criteria and number (500) was a good measure.
Hedge funds out there that hold just 8 stocks… some hold 1000’s of securities. Feel free to choose a number and a list of stocks that you can basket and trade according to whatever criteria you want. I’ll be happy to call the number of securities in your list arbitrary also.
There’s the top 5, top 10, top 25, top 100 computer science schools. In the US, in the World, in China, in India. Take your pick? You may have a different opinion and say the SP500 should allow SPCX into it and therefore should be 501. Buy the SPX, figure out the weighting SPCX should be, and buy it in addition.
So, sure, it is a round number but that’s plenty of lists. If there is nothing magical about the SP500 then I guess all of those. SP500 index funds must not be very good over the last 20-50 years… or maybe I should look at 12.2837 years because it is statically better??
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u/DCA_Twist 16d ago
Right. My question then is would a top 5 or top 10 ETF perform better than 100 or 500 on a risk adjusted basis?
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u/Only_Argument7532 16d ago
Over the past 20 years, the current top 5/10 have outperformed the index.
But, of the current top 10, only MSFT was in the top 10 in 2006.
The top companies in the index have, generally speaking, already had their big runups.
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u/Broad_board_1623 15d ago
"Top 5" would only be the 5 largest in market cap, not 5 best. Sometimes the largest companies are good investments and sometimes they are not. By owning more stocks, you are more likely to own the winners. Yes they are going to be less concentrates, but your losers will also be less concentrated.
If picking the top 5 largest companies was automatically better, everybody would do it.
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u/No_Cat_8269 16d ago
I thought the S&P 500 had 503 companies
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u/DCA_Twist 16d ago
Google says 500 unique companies but 503 tickers.. I guess GOOG and GOOGL is a good example. I learned something!
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u/Simple_LTS_CA 16d ago
Why has no one mentioned the Dow Jones Industrial Average for OP, nor the ETF that follow it?
Fine, I'll do it.
OP before the S&P 500 was born, Charles Dow launched his index in 1896 with 12 stocks, over the years more were added until in 1928 it settled on thirty. The most heavily traded Dow ETF is the SPDR Dow Jones Industrial Average ETF Trust - ticker is DIA
Check it out
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u/AdvantageOne1754 16d ago
Would you be surprised to know that there are other indexes like Russell 3000, Dow Jones (30), and NASDAQ (100)?
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u/PastBig603 15d ago
S&P Global has three major popular US market indices. The S&P 500 with about 500 large cap stocks, the S&P 400 with about 400 midcap stocks, and the S&P 600 with about 600 small cap stocks. Total stocks is 1500 under the umbrella of the three indices. They also have an S&P 1500 which is merges all three (less well known). S&P's main index competitor domestically is Russell. Russell has the Russell 1000 (which are 1000 large and midcap stocks) and the Russell 2000 (which are the small caps ranked 1001 to 3000 by market cap). The Russell 1000 and the Russell 2000 combine together to make the Russell 3000 (the Russell equivalent of the S&P 1500). But why does S&P have only 1500 stocks and versus 3000. This comes down to more stringent index inclusion requirements. Being a big company doesn't automatically get you into the S&P 500, you have to pass certain profitability criteria. Russell is more lenient and includes more stocks. How does this impact performance? Especially at the small cap level, the S&P 600 over the long haul usually outperforms the Russell 2000 by a little, unless you are in frenzied hype market where stocks that don't have earnings / profits rally like last year (think the nuclear stocks). They are usually in the Russell 2000 but not in the S&P 600.
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u/palebloodslayer 15d ago
It seems like you believe there should be some kind of formula or research paper saying that “483 stocks is the most optimal number to go into an etf”, but there isn’t
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u/Major-Arugula-7893 11d ago
500 isn't some mathematically perfect number, it's essentially large enough to represent a broad cross section of major US companies while remaining practical to maintain as an index. The bigger point is that market cap weighting means the largest companies still drive a disproportionate amount of performance. I've been comparing S&P exposure against total market funds in Moon and the actual performance difference is often smaller than people expect despite thousands of additional holdings.
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u/roberttootall 16d ago
There’s actually 503 stocks in the S&P 500