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 2015, over USD 7.5 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 2.1 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 Japan;
- 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 TOPIX
The S&P 500 and the TOPIX are widely regarded as primary performance indicators for the U.S. and Japanese equity markets, respectively. Both indices have been commonly used as benchmarks for investment in domestic stocks or equity funds for decades. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.
The TOPIX consists of 2,000 domestic common stocks listed on the Tokyo Stock Exchange First Section, while the S&P 500 comprises 500 leading U.S. companies representing around 80% of the market cap of the U.S. equity market. Index members for both indices are weighted by their freefloat market capitalization. Despite the fact that the number of S&P 500 members is only one-quarter of the number of TOPIX constituents, the U.S. equities benchmark is as diversified as the TOPIX in terms of stock and sector weighting.
The top 10 TOPIX members represent only 17.2% of the index and the largest component, Toyota, has a weight of just 3.6%. Similarly, the 10 largest stocks in the S&P 500 account for only 19.5% of the index, and the largest member, Apple, carries a stock weight of only 3.6%.