• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing

At 30, This ETF Is Still the Gift That Keeps on Giving

Have your cake and eat it too, as we celebrate the birthday of this fund.
By MARK ABSSY
Jan 24, 2023 | 01:37 PM EST
Stocks quotes in this article: SPY, GOOG, GOOGL, FOXA, FOXB, NWSA, NWS, TSLA

Happy birthday to the "O.G." of exchange-traded funds.

If I told you that possibly the world's best-performing, long-term equity portfolio turned 30 this past weekend, what would you think I'm talking about?

I'll give you a hint: It puts the 60 in just about every 60/40 allocation strategy. Another hint: It routinely crushes hedge funds. Final hint: It was the first ETF launched in America.

The answer? The SPDR S&P 500 ETF Trust (SPY) . The fund was first launched with a 20 basis point expense ratio which has since been lowered to 9.45. While there are cheaper copycat funds out there, SPY has been using its first-mover advantage for decades to retain and grow assets.

There are a whole bunch of articles out there talking about this milestone, its impact on the investing landscape, and generally celebrating how far we've come since SPY's 1993 launch. So I won't rehash all that here. Regular readers know that the one thing I like to do is explain how strategies work and that's what I'll try to do here.

Some of you might be thinking, "what does he mean? SPY is just the top 500 U.S. companies by market cap. What's to figure out?" If you are in this camp, hold on because while you and many assume that SPY is the original passive investment, nothing could be further from the truth. Let's take a look.

Putting SPY Under the Microscope

As with any index-tracking fund, the best place to learn about the strategy is in the index methodology. The index in question of course is the S&P 500 Index, or "SPX." The S&P has many methodologies that cover everything from corporate action handling to the mathematics behind index calculation to the process to adjust for free float (shares determined to be free and available to trade) and even the Global Industries Classification Standard (GICS) they use to classify and categorize every listed equity. Luckily, they also have a methodology that runs through all the steps they take to select index constituents. If you do follow the link, be warned that the document covers the S&P Total Market Index and all of its subsets, one of which is the S&P 500.

As mentioned earlier, this index family "is designed to measure the market performance of U.S. domiciled stocks trading on U.S exchanges." SPX "measures the performance of the large-cap segment of the U.S. market."

While both the index name and the methodology state the index "is composed of 500 companies," S&P includes both share classes for Alphabet ( (GOOG) , (GOOGL) ), Fox News ( (FOXA) , (FOXB) ), and News Corp ( (NWSA) , (NWS) ) Bringing that total holding number to 503. Interestingly, because the index is market cap weighted, each share class is weighted by its individual market capitalization, so there's no double counting. Also, because the main difference between these share classes has to do with shareholder voting rights, these shares do trade differently.

Bear with me for the next paragraph. Eligibility requirements include that a company must file a annual report. Things start to get a little squishy in the next requirement, which is that company fixed assets and revenues must be at least half U.S.-based. If revenues do not meet this location-based threshold, then fixed assets can be used to make this determination. If there isn't enough reported information to determine fixed asset geography, then the geographic revenue breakdown is used. Finally, there is a list of eligible exchanges that include all equity venues for the New York Stock Exchange, Nasdaq, and Cboe. Shares that trade Over-The-Counter are ineligible for inclusion. Eligible company types are limited to corporations, including equity and mortgage real estate investment trusts. The list of ineligible entities and share types is long and includes preferred stocks, American Depositary Receipts, special purpose acquisition companies, business development companies and ETFs.

There is a market cap minimum that is currently set at $12.7 billion and is reviewed quarterly. Companies must also have at least 50% available free float, meaning that no more than half of shares can be tied up with insiders or individual outsider positions of 10% of outstanding shares or more.

If an initial public offering is $2 billion or more in market cap, it can be fast-tracked into the index.

All of these rules sound like a lot, and they are, but, these are just the rules that guide the development of the universe of companies that are eligible for inclusion. The real magic happens on page 11.

Constituent Selection

What are the final selection criteria that are used to fill all slots in this standard bearer of measuring the American economy? How does S&P go about choosing these 500 names that ultimately become the index that over $13.5 trillion of assets track, not to mention open interest in the options and futures markets, as well as Volatility Index and all of its listed and OTC derivatives?

Sector weights are taken from the total market index, meaning that each sector in SPX reflects that sector's overall weight in the market. As for individual names, believe it or not, the secret sauce is the index committee. From the methodology:

"Constituent selection is at the discretion of the index committee and is based on the eligibility criteria."

Further, while many of the other indexes in the methodology have stated reconstitution and rebalance schedules, there is nothing specific to SPX. In other words, the $13.5 trillion investment management gorilla of passive, index-based investing is, by its own definition, an actively managed portfolio.

Wrap It Up

In 2019, the then-head of the S&P Index Committee retired. It was soon after that Tesla (TSLA)  was added to the SPX. My take on that addition was that the discipline and experience that Mr. Blitzer brought as chairman of that committee had left with his departure. I'm not saying that the reign of SPX is over, but my guess is that over time this index will start to lose some of its reputation for being unbeatable. Still, Newton's first law of motion tells us that with 66 years of index history and the trillions of assets tracking this index, SPX will be a force in the markets for a long time to come.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Abssy had no position in any security mentioned.

TAGS: ETFs | Investing | Stocks

More from Investing

The Indexes Are Holding Support, but That Is All

James "Rev Shark" DePorre
Mar 28, 2023 4:40 PM EDT

The biggest gainers were China-related names Alibaba, PDD Holdings Inc., and JD.com.

How LOW Will This Chart Go?

Bruce Kamich
Mar 28, 2023 2:50 PM EDT

Shares of Lowe's are retreating on the charts, so buyer beware.

Home Depot's Charts Reveal a DIY Downtrend

Bruce Kamich
Mar 28, 2023 2:07 PM EDT

It looks like overall housing trends may be throwing a wrench in the prices of HD.

In This Market, Walmart Offers Investors One-Stop Shopping

Brad Ginesin
Mar 28, 2023 1:43 PM EDT

WMT may not be a 'value stock' but in a choppy market, it is a supertanker sailing steadily ahead.

Are You Chomping at the BITC for a Direct Exposure Bitcoin ETF?

Mark Abssy
Mar 28, 2023 12:27 PM EDT

Let's take a close look at the Bitwise Bitcoin Strategy Optimum Roll ETF, its exposure to bitcoin, and ... Contango.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 04:00 PM EDT CHRIS VERSACE

    AAP Podcast: This Solar Company Is a Head-Turner

    Listen to my interview with Brian Roth, CEO of sol...
  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login