June 25, 2021
By: Montana Timpson
The S&P 500 just set a record intraday high; the S&P 500’s tech sector alone outperformed the broader market on Thursday, up 0.9% in recent trading, and technology stocks like Tesla (TSLA) are making headlines as traders jump back into the growth names that had underperformed so far for the year-to-date. The intraday high follows news of new data showing a drop in jobless claims and a rise in orders for durable goods.
More specifically, the S&P 500 was up 0.52% to 4,263.77 at the opening bell Thursday morning and hit 0.6% by mid-morning, on track for a closing high. The S&P 500 was not the only high-performing index of the day — the Dow Jones Industrial Average gained 240 points, up 0.7%, and the tech-heavy Nasdaq Composite rose 0.8%, also on track for a high.
To understand the importance of the S&P 500’s significant highs, professional traders must first understand the basis of the S&P 500. Here’s what active investors should know.
Definition of the S&P 500 Index
The S&P 500, more formally known as the Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest publicly traded companies in the U.S. The S&P 500 includes companies across eleven sectors to offer a picture of the health of the U.S. stock market and the broader economy.
In calculating market cap, current stock price is multiplied by the number of shares a company has outstanding — the S&P 500’s value is calculated based on the market cap of each of the 500 companies within the index, adjusted to consider only the number of shares that are traded publicly.
What Companies Are Included in the S&P 500?
To be eligible for the S&P 500, companies must meet certain criteria. Among other things, companies must have a market cap of at least $8.2 billion, be based in the United States, be structured as a corporation, offer common stock, be listed on an eligible U.S. exchange and have positive as-reported earnings over the most recent quarter in addition to over the four most recent quarters added together.
Trading the S&P 500
As with all indices, professional traders cannot buy the S&P 500 directly. Instead, investors can buy shares in an index that tracks the S&P 500 and seek exposure through ETFs, options on ETFs, index futures and mutual funds.
Ideal ETFs for active traders should have high liquidity, low transaction costs and tight bid-ask spreads, making S&P 500 Index ETFs a great option for professionals seeking short-term S&P 500 trading strategies. Some of the more prominent index funds that track the S&P 500 are Vanguard 500 Index Investor Shares (VFINX), Schwab S&P 500 Index Fund (SWPPX), Fidelity 500 Index Fund (FXAIX) and T. Rowe Price Equity Index 500 Fund (PREIX).
S&P 500 Index in the News
The S&P 500 is back in the headlines after surpassing its record high set a week ago as the market fully recovered losses triggered by the Federal Reserve’s policy announcements and the outlines of an infrastructure spending deal with the White House.
The revival in tech stocks marks a sharp shift back towards high growth stocks, whereas in recent months, investors piled into corners of the market that would benefit from rising bond yields and an improving economy, like the energy and financials sectors within the S&P 500.
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The author holds no positions in the securities mentioned.
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