The Hidden History of the S&P 500

The historical return of the S&P 500 is quoted everywhere, usually back to 1926. But did you know that it wasn’t composed of 500 stocks until 1957? Or that it was not adaptive to changing market conditions until 1988? The history of the S&P 500 is full of interesting facts.

·         S&P originally tracked 233 stocks, but it was too hard to maintain daily or hourly quotes on that many stocks before computers, so the S&P 90 was created in 1928.  The S&P 90 was 50 industrial stocks, 20 railroad stocks, and 20 utility stocks, and performance data was made available as often as hourly. S&P also kept track of the original 233 stocks, but reported on them weekly.

·         The original S&P 500 (in 1957) was 425 industrial stocks, 60 utilities, and 15 railroads. All 500 were listed on the New York Stock Exchange (NYSE). The 500 stocks covered roughly 90% of the total market value of the entire market.

·         In 1976, the composition changed to 400 industrials, 40 utilities, 40 financials, and 20 transportation stocks. It is amazing that financials were not included until the mid 1970’s! Many financial stocks traded over the counter (OTC), which had previously made them harder to incorporate.  Transports now included airlines, freight, and trucking companies instead of just railroads.

·         In 1988, the 400-40-40-20 model was finally abandoned to make the index more responsive to changes in the economy. This old fixed model proved un-adaptive in a fast paced economy.

Like many similar institutional structures, the S&P 500 was, at points, behind the times. Like the fairly arbitrary process for selecting the constituents of the Dow Jones Industrial Average (DJIA), the S&P constituent selection process resulted in an imperfect measure of the total market for long periods. Just more evidence that almost nothing in investing is perfectly precise.

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