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Why Does the S&P 500® Matter to Australia?

Weighing in on the Dow Jones Commodity Index and the S&P GSCI®

Why Does the S&P 500® Matter to Australia?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

The S&P 500 is regarded by many as the most well-known and most frequently used benchmark of U.S. large-cap equities. The index includes 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market. As of year-end 2013, over USD 7 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 1.9 trillion of this total. Exchange traded products of the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?

In this paper, we will:

  • Compare the S&P 500 to the leading large-cap equity benchmark in Australia
  • Explore the significance of the S&P 500 in the global equity market
  • Compare S&P 500 performance to that of active U.S. large-cap funds


The S&P 500 and the S&P/ASX 200 are well-known, large-cap equity benchmarks in the U.S. and Australian markets. Both indices represent about 80% of the total market capitalization and comprise the largest and most-liquid stocks of their respective markets. However, they differ significantly due to the different economic landscapes and financial market developments they reflect.

The S&P 500 is highly diversified among sectors, with no single sector dominating more than 20% of the index. Information technology (I.T.) is the biggest sector, accounting for 19% of the index. The financials and healthcare sectors are the other two biggest sectors, representing 16% and 13% of the S&P 500, respectively. The S&P/ASX 200 is highly concentrated in the financials sector, which dominates 45% of the index. Materials is the second-biggest sector with a weight of 17%.

Compared to the S&P/ASX 200, the S&P 500 has significantly higher weighting in the I.T. and healthcare sectors. Some of the biggest I.T. names, such as Apple, Microsoft and Google, are global leaders in the tech hardware, software and internet services industries. These companies represent more than 30% of the S&P 500’s I.T. sector and more than 22% of the S&P Global BMI’s2 I.T. sector. In the healthcare sector of the S&P 500, the three biggest companies are Johnson & Johnson, Pfizer and Merck, which are worldwide providers of healthcare and pharmaceutical products. These companies dominate more than 25% of the S&P 500’s healthcare sector and around 14% of the S&P Global BMI’s healthcare sector.


Weighing in on the Dow Jones Commodity Index and the S&P GSCI®

Weighting schemes can be essential to meeting portfolio goals across all asset classes, and commodities are no exception. Our two flagship commodity indices, the S&P GSCI® and the Dow Jones Commodity Index (DJCI), employ similar index construction methodologies, with weighting as the main difference between them.

2 Indices, 2 Weighting Schemes

The DJCI is an equally weighted index designed to include diversification and liquidity as intrinsic characteristics. Each commodity is liquidity weighted by a five-year average of its total dollar value traded. To apply caps for further diversification, the commodities in the index are grouped into components according to their physical similarities and correlations. The caps are applied so that no more than one component is greater than
32% and no subsequent component is greater than 17%. Lastly, the sectors are limited
to 33% weight in the index.

The S&P GSCI, on the other hand, is a world production weighted index. This index is
designed to reflect the relative significance of its constituents to the world economy, while preserving its tradability by limiting eligible contracts to those with adequate liquidity.  With respect to each designated contract, a contract production weight (CPW) is calculated based on world production and trading volume. Calculating a designated contract’s CPW involves the following four-step process:

  1. Determination of the world production quantity (WPQ) of each S&P GSCI
  2. Determination of the world production average (WPA) of each S&P GSCI
    commodity over the WPQ period;
  3. Calculation of the CPW based on the contract’s percentage of the relevant total
    quantity traded (TQT); and
  4. Certain adjustments to the CPWs.

The resulting index compositions differ dramatically. Energy is weighted higher in the
S&P GSCI at 72.1% vs. 33.8% in the DJCI. In addition, metals has a relatively low
weight in the S&P GSCI at 9.6%, compared with 35.5% in the DJCI, while agriculture and livestock hold 18.2% in the S&P GSCI vs. 30.7% in the DJCI (see Exhibit 1).


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