Could The S&P 500 Undergo A “Special” Rebalance Anytime Soon? - How Think Of This Possibility
Now that we are live and not just improving our core product but also (hopefully!) satisfying our first customers we thought it might be useful to give greater prominence to client questions and concerns.
In that vein, after last week's Nasdaq "Special" Rebalance piece we received an important question from an early client:
Could the S&P 500 itself rebalance for similar reasons and along similar lines?
Good question and thank you for raising it! We arguably should have touched on this possible scenario last week. As always there is a lot to say and tough to get the balance correct.
As always please send any feedback to -> contact@pebble.finance
Short answer:
Yes, S&P has the discretion to initiate a special rebalance of the S&P 500 but it is unlikely to happen any time soon.
Long(er) answer:
S&P Dow Jones Indices as owners and custodians of the S&P 500 index have specific guidelines for when such a "special" or irregular rebalance must occur.
At least for now, these conditions are still quite far from being met.
Why?
Well, their regulations stipulate that rebalancing the weights in the S&P 500 takes place when the aggregate size of a small group of companies adds up to being greater than 50% of the total index but with each individual company must be above 4.5% of the index.
Fundamentally, that isn't close to happening right now.
In fact, right now, Apple and Microsoft are the only two firms with an individual weight over 4.5% in the S&P 500.
Additionally, the top five firms, with the most influence in the S&P 500, a group that also includes Amazon, Nvidia and Tesla, only make up around ~21% of the index's total market value.
So, the S&P 500 is pretty far from the special rebalance threshold.
This actually raises a larger point worth thinking about:
The S&P 500 - chock full of so many large US companies and global multinationals - is far more diverse and has many other sizable companies than the narrower tech-heavy NASDAQ-100.
Also by definition of it having ~500 stocks, it has far more companies outright in the index, of course. That helps too!
Both of these facts are worth remembering when buying an index product. As we always say, indexing matters but what index you own may matter more....
So, please use this Nasdaq rebalance as a catalyst and stop and consider for a moment:
What index do you own in your 401k or passive investing account or both?
And, just how diverse is it?
You might be shocked to find out how little you know about the indices you have taken for granted. We usually make this point about the EXPENSE of those indices - which still matters, to be clear - but their innate STRUCTURE and especially their basic diversity is also extremely important.
To conclude, hopefully you are invested in cheap and very diversified index or two but then there is the question of what is actually in those benchmarks.
For instance, many investors might be quite surprised to find out what is in a "tech" focused index like the NASDAQ-100.
Helpfully, on that front we have some new information.
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Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
