A primer on the S&P; 500 index

Here are some basics about the Standard & Poor’s 500 stock index, which on Wednesday hit a record high -- finally surpassing its previous peak reached in 2000.

What is the Standard & Poor’s 500 index?

Many on Wall Street consider the S&P; 500 to be the premier U.S. stock market index. Although the Dow Jones industrial average may be more widely quoted as a gauge of the market’s health and trend, it is a narrow index, containing just 30 stocks. The S&P; index tracks the shares of 500 U.S. corporations. It includes most major brand-name companies, such as Exxon Mobil Corp., Microsoft Corp. and General Electric Co., as well as less-well-known firms such as specialty chemical company Hercules Inc. and winemaker Constel- lation Brands Inc.

Many investors who want simply to “own the U.S. market” have long favored the S&P; 500 as the best proxy. About $1.3 trillion is invested in pension fund accounts, mutual funds and other accounts that are designed to mimic the performance of the index, according to S&P.; An additional $4.8 trillion is in accounts and funds that use the S&P; 500 as a benchmark -- meaning the performance of those accounts is compared to the index to judge whether the fund managers beat the market or lagged behind it.

How long has the S&P; 500 been around?

The first version of the index was launched in 1923 by the Standard Statistics Bureau, a private provider of market data. The first index included 233 stocks. In 1941, the bureau merged with Poor’s Publishing Co. (founded in 1867 by Henry Varnum Poor) to form Standard & Poor’s. In 1957 S&P; expanded its main index to 500 stocks.

Who decides which stocks go into the index?

A committee of eight analysts and economists at S&P;, which since 1966 has been owned by the McGraw-Hill Cos. S&P; says the goal is to keep the index representative of the U.S. stock market as a whole. That means periodically replacing shares of fading companies, or those that are bought out, with up-and-coming firms.

In practice, nearly all of the largest U.S. companies by sales are in the S&P; 500.

How is the index calculated?

The S&P; 500 is a market-capitalization-weighted index. The stock prices of the 500 companies are averaged, but the average is weighted by market capitalization, which is the dollar value of a company’s outstanding shares.

To calculate the index, the market capitalizations of its component companies are totaled and the result is divided by a number (called the divisor) that is periodically adjusted to reflect changes to the index and other factors. The goal is continuity.

In any capitalization-weighted index, the stock moves of the biggest companies by market value tend to have the greatest day-to-day effect on the index. By contrast, the Dow is a price-weighted index, which means the stocks with the highest per-share prices tend to have the greatest effect on its swings.

Does any single industry dominate the index?

The sector that currently accounts for the largest chunk of the index’s value is financial services, including banks and brokerages. The financial industry makes up 22% of the index’s value, according to S&P.; The next two largest sectors are technology, at 15%, and healthcare, at 12%. The smallest of the index’s 10 major industry sectors is basic materials, at 3%.

At the last bull-market peak in 2000, technology accounted for 35% of the index’s value -- a big reason the index plunged 49% from March 2000 to October 2002.

Which sectors have led the index higher in the current bull market?

Energy stocks have been the best performers since October 2002. The S&P; 500 energy sector is up 208% since then. The weakest sector has been consumer staples, an area that includes companies such as Wal-Mart Stores Inc. and Coca-Cola Co. That sector is up 38%.

The tech sector of the S&P; is up 122% since October 2002, but still is down 61% from its March 2000 peak.

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tom.petruno@latimes.com

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Tracking the S&P; 500 by sector

Here are the 10 stock sectors within the Standard & Poor’s 500 index and how each has performed since the last bull market peak on March 24, 2000, since the bear market low of Oct. 9, 2002, and year to date.

*--* Change since Change since Change Sector March 2000 Oct. 2002 YTD Energy +151% +208% +15% Utilities +42 +172 +13 Materials +84 +145 +16 Technology -61 +122 +8 Telecom -43 +120 +16 Industrial +30 +109 +9 Financial services +52 +103 +3 Consumer discretionary +10 +88 +4 Healthcare +32 +42 +9 Consumer staples +71 +38 +6 S&P; 500 index +0.2 +97 +8

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Price changes only; dividends aren’t included.

Source: Bloomberg News