What Kinds Of Stocks Are In The S&P 500?

What Kinds Of Stocks Are In The S&P 500?

by Dec 20, 2018

Even if you’ve never invested a single cent in the stock market, you’ve probably heard of the S&P 500, which stands for Standard & Poor’s 500 Index. The S&P 500 is one of (if not the) most common index used to track the performance of the US stock market.

The S&P 500 is based on the stock prices of five hundred large US companies that trade on the New York Stock exchange (NYSE) and the NASDAQ. While the S&P 500 is frequently used as a bellwether for the overall health of the entire stock market, and American businesses as a whole, it turns out that it doesn’t actually reflect as broad a swath of the economic spectrum as many people might assume.

For prospective investors, knowing what is, and isn’t, included in the S&P 500 is important. To build a balanced portfolio, an investor should have exposure to a wide range of industries and businesses with both large and small market capitalizations.

If you invest only in the S&P 500 because you think it gives you all the diversity you need, you’ll likely end up with a lopsided portfolio.
 

Large Companies Only

The S&P 500 purposefully includes only large companies. This means companies like Apple, Amazon, JP Morgan Chase, and Berkshire Hathaway. While there’s nothing wrong with investing in large companies, you’ll miss out on potential returns from medium and smaller size companies.

To increase potential returns and diversity, consider other indexes that contain stocks from small and medium size companies, like the S&P 400 (which tracks the top 400 mid-cap companies) or the Russell 2000, which features smaller companies.
 

Tech, Healthcare, And Finance

It’s important to know that the companies that are included in the S&P 500 can, and have, changed over the years. At the end of November of this year, the breakdown of sectors in the index looked like this:

  • Information Technology: 19.9%
  • Healthcare: 15.8%
  • Financial: 13.7%
  • Consumer Discretionary: 9.9%
  • Communications Services: 9.9%
  • Industrials: 9.4%
  • Consumer Staples: 7.4%
  • Energy: 5.4%
  • Utilities: 3.1%
  • Real Estate: 2.9%
  • Materials: 2.6%

As you can see, the S&P is currently heavily weighted towards tech, healthcare, and financial stocks. Companies in sectors like real estate, raw materials, and utilities are vastly underrepresented.

What this means for you as an investor is that, if all your money was in the S&P 500, and tech stocks had a bad quarter, or year, your losses would be much heavier than if you portfolio was more balanced across every industry.
 

Balancing Your Portfolio

There are an almost infinite number of ways to create a balanced investment portfolio. If you are new to the world of investing, it may be worth your time to speak with an experienced financial planner. Utilizing a professional’s experience allows you to mitigate the risk that comes with being a new investor, while also providing helpful guidance and insight about the markets.

To learn more about investing, or to start a new investment portfolio, please contact us today to schedule a free consultation.

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