The S&P 500 is a renowned benchmark for large-cap U.S. equities. The index is designed to measure 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market. As of year-end 2017, over USD 9.9 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 3.4 trillion of this total. Exchange-traded products based on 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 equity benchmark in Brazil;
- Explore the significance of the S&P 500 in the global equity market; and
- Compare S&P 500 performance to that of active U.S. large-cap funds.
COMPARISON OF THE S&P 500 AND THE IBOVESPA
The S&P 500 and the Bovespa Index (Ibovespa) are widely regarded as primary performance indicators for the U.S. and Brazilian equity markets, respectively. Both indices have been commonly used as benchmarks for investment in domestic stocks or equity funds. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.
The S&P 500 comprises 500 companies and represents around 80% of the market cap of the U.S. equity market, while the Ibovespa measures the performance of the more actively traded and more representative stocks of the Brazilian equity market, covering approximately 85% total value traded on the B3 in the preceding 12-month period. Both are free-float, marketcap-weighted indices, but the S&P 500 has much greater stock diversification than the Ibovespa.
Compared with the Ibovespa, the S&P 500 is much more diverse in terms of the weight of constituents held in the index. The 10 largest S&P 500 members represent only 21.2% of the index, and the largest component, Apple, has a weight of just 3.9%. In contrast, the 10 largest stocks in the Ibovespa dominate 54.1% of the index, and the largest two members, Vale S.A. and Itau Unibanco Holding SA Pfd, carry stock weights as high as 13.0% and 10.2%, respectively (see Exhibit 1).