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3 Facts You Didn't Know About the S&P 500

By Dan Caplinger - Jan 18, 2016 at 9:15AM

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The much-followed index has some quirks most people aren't aware of.

Image source: Flickr user Andreas Poike.

Investors have trillions of dollars in investments that track the S&P 500 (^GSPC -0.16%), and the index is among the most popular benchmarks not only in terms of index-tracking investments but also in measuring investment performance in the stock market. Yet even though it's incredibly important for investors, the S&P 500 has some little-known aspects to it. Let's take a look at three facts that most people don't know about the S&P 500.

1. The primary S&P benchmark index didn't always have 500 stocks.
Most long-term analysis of stock market returns traces the S&P index back to before the stock market crash of 1929. When it first started its index in 1923, Standard & Poor's tracked 233 different companies and calculated the index every week. That was inconveniently infrequent, so S&P later developed an alternative index with 90 different stocks that it could calculate on a daily basis.

The S&P 500 as we now know it, with 500 stocks, didn't come into being until 1957. The index was billed as including 500 leading U.S. companies, greatly expanding the scope of the other S&P indexes.

2. The S&P 500 has become much more diversified.
When the 1957 version of the S&P 500 was created, Standard & Poor's included only three categories of stocks in the index. Industrial stocks held the lion's share of the spots, making up 425 of the 500 stocks. The index included 60 utility stocks and 15 railroad stocks, and all of the index constituents were listed on the New York Stock Exchange.

In the mid-1970s, S&P loosened up its quota model slightly. The index's industrial contingent was reduced to 400 stocks, and only 40 utilities kept their spots. Twenty stocks in the transportation sector were part of the index, no longer limited to railroads, and 40 financial stocks rounded out the 500.

Nevertheless, in order to meet its goal of reflecting the make-up of the U.S. economy, S&P eventually had to take further action. In the late 1980s, given the rise of technology and energy stocks, the index manager finally chose to give up on the quota system entirely. Now, S&P chooses stocks with an eye toward having a representative sample across the stock market.

3. There are now strict requirements for getting into the S&P 500.
S&P Dow Jones Indices manages the S&P 500 index, and it maintains eligibility criteria that stocks must meet before they can become part of the index. First, there's a market capitalization requirement, and to pass, a company has to have a $5.3 billion market cap or higher. Second, liquidity requirements include a minimum trading volume of 250,000 shares per month in each of the six months prior to a stock's evaluation for entry. Total dollar value of traded shares on an annual basis must exceed the float-adjusted market capitalization, and public float must be at least 50% of the total shares outstanding.

The S&P 500 is meant to include U.S. companies, but the definition of what constitutes such a company has changed over time. Now, the company recognizes that tax inversions and other corporate strategies can result in a company's headquarters being located overseas. But if most of the company's fixed assets are in the U.S. or if more of its revenue comes from U.S. sources than from other countries, then the index managers can include the company in the index. Finally, a company must be financially viable, with positive earnings over the preceding four quarters as well as the most recent quarter.

The S&P 500 is ubiquitous as a measurement of stock market success, but many people don't know its history. These little-known facts show some good insight into the origin of the S&P 500 and how it has evolved over time.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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