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S&P 500 Index Options - SPX

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S&P 500 Components

The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares.

For a list of all 500 component stocks, please click here.

Background on the S&P 500 Stock Index

[The following is an excerpt from the 1998 S&P 500 Directory.]

The S&P 500 Composite Stock Price Index is a market-value-weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and the Nasdaq National Market System. The weightings make each company's influence on the Index's performance directly proportional to that company's market value. It is this characteristic that has made the S&P 500 Index the investment industry's standard for measuring the performance of actual portfolios.

Unlike other lists of companies, the ones selected for the S&P 500 are not chosen because they are the largest companies in terms of market value, sales, or profits. Rather, the companies chosen for inclusion in the Index tend to be the leading companies in leading industries within the U.S. economy. That is why in 1968 the Index became a component of the U.S. Department of Commerce's Index of Leading Economic Indicators. Now published by the Conference Board as the Composite Index of Leading Indicators, that widely followed index is used to signal potential turning points in the U.S. economy.

The origins of the S&P 500 Index go back to 1923, when Standard & Poor's introduced a series of indexes that included 233 companies that were grouped into 26 industries. Since then, Standard & Poor's has expanded its coverage over the years; in July 1996, following introduction of a new, comprehensive industry group classification system for all securities in the S&P Stock Guide Database, there were 105 specific industry groups in 11 economic sectors represented in the S&P 500. Four major industry sectors have also been developed: Industrials, Utilities, Financials, and Transportation. The number of companies in each major industry sector has been allowed to float since 1988 in order to enable the Standard & Poor's Index Committee to react efficiently to an increasingly dynamic economy and stock market.

"Over the years, the S&P 500 has really become the index to beat for most investors," according to Roger Fenningdorf, director of U.S. equity research at the Rogers Casey pension-fund consulting firm. "In the world of professional money management, we've all become fixated on how well managers do relative to the S&P."

The Suitability of the S&P 500 Index as a Benchmark

[The following is excerpted from the 1998 S&P 500 Directory.]

The use of the S&P 500 as the proxy for the overall stock market predates the widespread adoption of the Capital Asset Pricing Model (CAPM) in the 1970s. As the amount of money invested in the equity markets grew in the 1950s and 1960s, the need for a capitalization-weighted, broad-based market indicator that reflected how people actually invest in equities became self-evident. By convention, the S&P 500 Index, already well-known to academics and to professional money managers, was used as the market portfolio in tests of the CAPM. Betas of individual stocks were then calculated against the S&P 500 Index, which by definition had a portfolio beta of 1.00.

These days, it is difficult to find an equity manager who cannot tell you how its portfolio's performance compares with the S&P 500. Some companies, such as Fidelity, even make a portion of their management fees contingent on whether their funds outperform the S&P 500. In the Magellan Fund's case, its fee is raised or lowered by 0.20% of assets, depending upon how it fares against the S&P 500's total return over a rolling three-year period.

However, it is no longer possible for an investment management firm simply to claim that it beat the S&P 500. The adoption of performance presentation standards by the Association for Investment Management and Research (AIMR) and their inclusion as of January 1, 1993, as Standard III F of the AIMR Standards of Professional Conduct, has focused attention on the need for properly defined and utilized investment benchmarks. The firm must use a benchmark that parallels the risk or investment style the client's portfolio is expected to track.

A valid benchmark should be a passive representation of the manager's investment process, and the manager's portfolio should fall inside the manager's benchmark universe, according to Jeffery V. Bailey, CFA, of Richards & Tierney, Inc. Speaking at the November 1994 AIMR conference on Performance Evaluation, Benchmarks, and Attribution Analysis in Toronto, Bailey outlined six requirements for a valid benchmark:

  • The benchmark must be unambiguous.
  • The benchmark must be an investable, passive alternative.
  • The benchmark must be measurable.
  • The benchmark must be appropriate for the manager.
  • The benchmark should be a reflection of the manager's current investment opinions.
  • The benchmark must be specified in advance, i.e., before the manager's performance review period begins.

In order for an index to work as an investment benchmark, it must provide an unbiased model of the market segment it is intended to represent. The S&P 500 has evolved over the years to fill that need. When the S&P 500 was introduced in 1957, all of its components were listed on the New York Stock Exchange. The S&P 500 was designed as a sample drawn from that pool to represent the market performance of the leading companies in the leading industries in the United States. Unlike the Fortune 500, which simply ranks the largest 500 publicly traded companies in the United States in terms of sales, companies have never been chosen for the S&P 500 simply because of their size. However, the initial 500 stocks comprised 90% of the market value of all the companies on the Big Board.

The academic community quickly adopted the S&P 500 as the benchmark used in the evaluation of investment theories. As part of his work in developing the Capital Asset Pricing Model, William Sharpe created the notion of the market portfolio, one of the major characteristics of which is that each asset in that portfolio is held in exact proportion to its market value.9 That also happens to be the basis upon which the S&P 500 is constructed, a fact noted not only by the researchers who used it to develop modern portfolio theory but also by the creators of indexed stock funds.

As both the U.S. economy and the equity markets grew, Standard & Poor's expanded the selection pool for the S&P 500 to include stocks traded on the American Stock Exchange and over the counter on the Nasdaq quotation system. The S&P 500 remains broadly based, containing stocks in more than 100 different industry groups ranging alphabetically from Aerospace/Defense to Waste Management. As noted above, its role as the best benchmark of the stock market's performance is reflected by its inclusion in the Composite Index of Leading Economic Indicators. As of December 31, 1996, the stocks in the S&P 500 had a total market capitalization of $5.626 trillion. A year later, the market capitalization had reached $7.555 trillion.

Putting that figure into perspective, at the end of 1997, there were 7,710 U.S. equity stocks, valued at $10.320 trillion, in the Standard & Poor's Stock Guide database. The S&P 500 accounted for approximately 73% of the database's capitalization, and the S&P MidCap 400 Index accounted for 9%. The S&P SmallCap 600, designed as a representative sample of the more than 6,300 remaining stocks, contained 3% of the database's capitalization, leaving 15% in terms of capitalization outside of the Standard & Poor's indexes. Together, the 1,500 stocks in all three indexes comprise the S&P Super Composite 1500, which was introduced on May 18, 1995. At the end of 1997, the Super Composite had a market capitalization of $8.089 trillion, representing 85% of the total value of the U.S. equities in the database.

Because of the Index's mandate to select leading stocks in leading industries, the S&P 500 has evolved into a measure of large-capitalization stocks. The average market capitalization of the companies in the S&P 500 at the end of 1997 was $15.109 billion, and the median valuation, the point at which the 500 stocks could be split into pools of the 250 largest and 250 smallest companies, was $6.881 billion. Furthermore, as has been the case since the S&P 500 was created, most of the capitalization is concentrated in the largest companies; at the end of 1997, the top 50 companies accounted for 49.33% of the Index's total capitalization, up from 47.61% a year earlier. However, that dominance compares to the situation at the end of 1986, when the top 50 stocks in the S&P 500 contained 45.23% of its market cap. In 1986, the 50 smallest stocks in the S&P 500 contained just 0.60% of the Index market cap; in 1997, the smallest 50 contained 0.82% of the capitalization.

This large-cap bias is not the result of a deliberate attempt to draft for size, but rather is a reflection of the S&P 500's traditional mandate to include the leading companies in leading industries. The companies that are added to the S&P 500 did not mushroom overnight; they grew into their industry leadership positions. Furthermore, once added to the S&P 500, those leading companies have tended to keep leading their industries.

All Standard & Poor's indexes are constructed with the aim of matching, as closely as is practicable, the economic sector distributions of the securities universes from which they are drawn. This allows comparison of Standard & Poor's sector weightings with those of actively managed portfolios, so that a plan sponsor or pension fund consultant can determine exactly where a manager is adding (or losing) value in the selection of stocks or the execution of trades. This procedure also works across all Standard & Poor's equity indexes, because they are constructed to form a coherent whole.

The question of index rebalancing also must be addressed. Stocks in the S&P 500 can never become too large. However, some stocks have faltered and become relatively small. (Sometimes, entire industries-including many not generally perceived as cyclicals-fall into hard times; some companies recover, others do not.) Rather than periodically (or prematurely) remove such outliers from the Index, as some competing large-cap indexes do on an annual or even quarterly basis, Standard & Poor's attempts to keep portfolio turnover at a minimum. Every change in a benchmark's components adds costs for the investment managers replicating it, without necessarily adding value. Heavy turnover also adversely affects the usefulness of historical data.

The AIMR standards require benchmarks to be consistently applied and to parallel the risk or investment style that the client's portfolio is expected to track. For example, if a portfolio is weighted to consist of 50% large-cap stocks and the remainder mid- and small-cap stocks, then the Standard & Poor's indexes could be used to customize a benchmark. One solution might consist of 50% S&P 500 Index with the remainder split between the S&P MidCap 400 Index and the S&P SmallCap 600 Index in accordance with the targeted weightings in the client's portfolio. The splits of the S&P 500 into the S&P/BARRA Growth Group and the S&P/BARRA Value Group, and of the S&P MidCap 400 into its respective S&P/BARRA MidCap Growth and S&P/BARRA Value Groups also provide tools for the creation of customized benchmarks for style-tilted portfolios. The total returns on each index segment then can be combined to produce the total-return data for the benchmark portfolio.

Standard & Poor's determines the total returns on its indexes by using accrual accounting of dividends as of their ex-dividend dates. Cash flows are evaluated daily by this procedure, in accordance with AIMR's recommended practice. Furthermore, because Standard & Poor's accounts for cash flows caused by corporate actions (such as spinoffs or new share issuances) daily as they occur, Standard & Poor's index data provide a true time-weighted rate of return.

The CBOE S&P 500 BuyWrite Index (BXMSM) is designed to represent a proposed hypothetical buy-write strategy. Like many passive indexes, the BXM Index does not take into account significant factors such as transaction costs and taxes and, because of factors such as these, many or most investors should be expected to underperform passive indexes. Investors attempting to replicate the BXM Index should discuss with their brokers possible timing and liquidity issues. Transaction costs and taxes for a buy-write strategy such as the BXM could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Past performance does not guarantee future results. Standard & Poor's, S&P, and S&P 500 are registered trademarks of The McGraw-Hill Companies, Inc. and are licensed for use by the Chicago Board Options Exchange, Incorporated (CBOE). CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM and PUT Indexes. CBOE S&P 500 BuyWrite IndexSM BXMSM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or pending patent applications.

Options involve risk and are not suitable for all investors. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options(ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information in these materials is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in these materials. No statement within these materials should be construed as a recommendation to buy or sell a security or to provide investment advice. Any strategies discussed, including examples, do not include commissions, dividends, margin, taxes, and other transaction costs. However, these costs will affect the outcome of transactions and should be considered. S&P 100 and S&P 500 are registered trademarks of the McGraw-Hill Companies, Inc., and are licensed for use by the Chicago Board Options Exchange, Inc. (CBOE). The "Russell 2000 Index is a registered trademark of Frank Russell Company. The Nasdaq 100 is a registered mark of The Nasdaq Stock Market, Inc. "Dow Jones SM", Dow Jones Industrial AverageSM", "Dow Jones Transportation AverageSM," and "Dow Jones Utility AverageSM" are service marks of Dow Jones & Company, Inc. and have been licensed for certain purposes by the CBOE. LEAPS, FLEX, FLexible EXchange, CBOE, Chicago Board Options Exchange and OEX are registered trademarks of CBOE, and Long-term Equity AnticiPation SecuritiesTM and SPXTM are trademarks of the CBOE.

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