The (Mis)Uses of the S&P 500
63 Pages Posted: 29 Jun 2018 Last revised: 6 Sep 2019
The S&P 500 is widely used as (i) a means of directing investor capital through “passive” investing, (ii) a benchmark for evaluating the performance of investment portfolios and managers, and (iii) a means of evaluating the performance of firms and corporate managers. In this Article, I show that, far from being neutral or constant, the index represents a substantial amount of discretionary decision-making, and is simply one particular large cap index whose composition changes substantially over time. I quantify the magnitude of this discretion and the implications of changes in composition and show that they are large. Failing to recognize these features can lead to substantial misuses of the index in all three contexts.
Keywords: stock market indices, S&P 500, securities, mutual funds, passive investing, active investing
JEL Classification: K22, G11,G29
Suggested Citation: Suggested Citation