Bobby Jones and Cliff Roberts joined together in the 1930’s to turn a plot of land in Augusta, Georgia into the premier golf destination in the United States. Beginning in 1934, the course played host to The Master’s Tournament, which is now considered to be one of the four major championships of professional golf and the only major held on the same course year after year.
Augusta National Golf Club has approximately 300 members, no application process, and inclusion is by invitation only. This select membership failed to include any African Americans until 1990 and didn’t include women until 2012. A quick perusal of the membership list illustrates what is needed to become a member, wealth and power.
Augusta’s facilities aside from the majestic golf course are nothing to write home about and the social scene looks to begin and end on the course. Many of its members rarely even play golf, let alone make the trip to Augusta to do so. The allure of Augusta, no matter how scandalous it’s practices, is the exclusivity.
The First Investment Club
Standard and Poor’s set aside to create their own club. An investment club made up of the most powerful companies the U.S. had to offer. The S&P 500 index came into current form in March 1957. Standard and Poor’s was hopeful that the index would serve as a better way to track the entire U.S. stock market as opposed to the industrial complex that the Dow Jones average tracked.
Initial results were more poor than standard. The index was difficult to price on a daily basis and it was even more difficult to move people away from the DJIA standard. In 1962, Ultronic Systems Corp. signed an agreement with S&P to compute the value of the index along with the other offshoots of the index fathered by S&P. After a rocky start, the technology issues were mostly solved, leaving remaining public perception as the sole road block.
As mutual fund companies created index funds to track the S&P 500, the idea of using the S&P as a benchmark began to take hold. Current technology enables the index to be recalculated every 15 seconds, which has allowed for more participation in index tracking by exchange traded funds (ETF’s).
Current Composition
The Index currently houses 505 stocks that track the performance of 500 companies as some companies have multiple share classes (Alphabet/Google is the most recent example). The index itself is self-policing as membership is attached to a company’s market capital. Companies enter and exit the index at a faster pace than you might expect.
In most years, 25-30 stocks making up the index are replaced. Companies leave the S&P 500 either because poor performance causes their market cap to fall below the threshold, or due to a merger or other recapitalization.
Several high profile financial companies exited the index in 2008/2009 led by FNMA and Freddie and a host of others. When Dell Computer was taken private, it disappeared from the index in 2013. In some rare cases, a spin off can turn one company into two. Ebay’s recent spinoff of Paypal created two separately traded stocks that were both large enough for inclusion.
The addition of a new member, requires the expulsion of an existing member and vice versa. The chart below shows the activity over the last several months. Inclusion in the index is a big deal for a company. Index funds are forced to buy a new member and sell the company it is replacing.
This forced buying and selling can exacerbate moves in the stock price of the company. A cottage industry of index speculators has arisen to try to take advantage. They purchase stocks of companies poised to enter the index. Current favorites of these firms are Tesla and LinkedIn.
| Added | Removed | ||||
| Date | Ticker | Security | Ticker | Security | Reason |
| October 7, 2015 | VRSK | Verisk Analytics | JOY | Joy Global | Market capitalization change. |
| September 2, 2015 | UAL | United Continental Holdings | HSP | Hospira Inc | Hospira taken over |
| August 28, 2015 | ATVI | Activision Blizzard | PLL | Pall Corp | Pall taken over |
| July 29, 2015 | SIG | Signet Jewelers | DTV | DirectTV | DirectTV acquired by AT&T |
| July 20, 2015 | PYPL | PayPal | NE | Noble Corp | PayPal Spun off by eBay |
| July 8, 2015 | AAP | Advanced Auto Parts | FDO | Family Dollar Stores Inc. | Family Dollar Aquired. |
| July 2, 2015 | CPGX | Columbia Pipeline Group Inc. | ATI | Allegheny Technologies | Spin off of Columbia Pipeline. |
| July 1, 2015 | JBHT | J.B. Hunt | TEG | Integrys Energy Group Inc. | Integris taken over. |
| July 1, 2015 | BXLT | Baxalta | QEP | QEP Resources | Baxalta spun off by Baxter. |
| July 11, 2015 | QRVO | Qorvo | LO | Lorillard Inc. | Lorillard Inc. gets acquired. |
| April 7, 2015 | O | Realty Income Corporation | WIN | Windstream Holdings Inc | Market capitalization change. |
Instant Inclusion Permanent Exclusion
In some rare cases, a company enters the stock market and the index with little delay. Facebook entered the index less than two years after going public. The same is true for Google. Not every big IPO will be offered the S&P 500 invitation. Alibaba does not meet the current criteria for inclusion, which include 50% public float of shares, and a U.S. domicile.
It is a common misperception that the S&P 500 contains the largest 500 companies listed on the stock market. It does not. The index also doesn’t have to include the largest company outside the index to replace a stock leaving the S&P. Actual inclusion in the index is chosen by a committee. A stock has to meet certain requirements for inclusion but after that the committee is free to pass over a company if it feels the inclusion of an alternative company will help the index better reflect the U.S. Equity Markets.
Much like Augusta National. The S&P 500 has its quirks, and is not as simple or as transparent as we would like, but for the most part the S&P 500 index does a good job of capturing the markets mood and rewarding the ultra-successful companies with membership in a very exclusive club. More importantly, unlike Augusta, the S&P 500 has paved the way for a more diverse group of investors (smaller) to participate in the markets.
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