S&P 500

The S&P 500 is not simply the 500 biggest US companies. An index committee at S&P Dow Jones Indices picks the members using published eligibility rules for new additions. In general terms, a candidate must be a US company that is large enough, has enough of its shares freely tradable and passes screens for trading activity and profitability. Under the size guideline S&P set effective July 1, 2025, a newcomer needed a total company market value of at least $22.7 billion, a cutoff pegged to about the 85th percentile of the US market’s cumulative value, and the value of its publicly tradable shares had to be at least half that amount. S&P reviews these size ranges at the start of every calendar quarter and updates them as needed, so the current cutoff may differ.

The rules apply to additions, not to continued membership, so a member that shrinks below the bar is not removed unless the committee decides a change is warranted. Replacements happen at the quarterly rebalances and whenever a merger, acquisition or bankruptcy removes a member, so the index is best read as a curated list of large US companies rather than a strict ranking by size.

The S&P 500 is weighted by float-adjusted market capitalization. Float-adjusted means only the shares available to public investors count, not closely held blocks. The index value at any moment is the combined market value of those shares across all members, divided by a scaling number called the divisor. S&P adjusts the divisor whenever members or share counts change, so the index level does not jump just because the list changed.

Market-cap weighting lets winners grow to dominate. At September 30, 2025, the ten largest companies made up about 40% of the stock holdings of the SPDR S&P 500 ETF Trust, which mirrors the index. On December 31, 2025, semiconductor companies alone were 14.19% of the index and software and services companies another 11.29%. An S&P 500 index fund therefore gives broad Diversification across companies and industries, but with a heavy tilt toward a handful of very large firms.

The S&P 500 level quoted in the news is a price index: it follows share prices only. Member companies also pay dividends, and a fund that owns them collects that income. The total return version assumes every dividend is reinvested, and it is the fair yardstick for comparing an index fund, or your own portfolio, with the index. Over long periods the dividend gap compounds into a large difference, so a fund compared with the price index will look better than it really did.

With dividends reinvested, the S&P 500 returned 17.88% in 2025, according to the prospectus of the SPDR S&P 500 ETF Trust, which tracks the index; the same fund lost 19.60% in the first quarter of 2020 alone. Figures like these are before inflation and describe the past, not a promise. Before building a plan on any average, test it against bad sequences using historical backtests or a Monte Carlo simulation, and think in terms of the real rate of return after inflation.

S&P Dow Jones Indices divides the US market by company size. The S&P 500 covers large companies, the S&P MidCap 400 the next tier and the S&P SmallCap 600 smaller firms; together they make up the S&P Composite 1500. Total-market indexes go further and include most listed US companies of every size, so an S&P 500 fund and a total-market fund overlap heavily without being identical.

The other two indexes quoted in the news are built differently. The Dow Jones Industrial Average is an older and much smaller index that is price-weighted: a stock with a higher share price counts for more, whatever the size of the company behind it. The Nasdaq Composite has no selection committee and no size test: nearly every eligible stock listed exclusively on the Nasdaq exchange, US or foreign, is included and weighted by market value.

None of these indexes holds Bonds, and none is built to represent stock markets outside the US. That is why a simple mix such as the three-fund portfolio pairs a US stock index with international stocks and a bond fund, and why the S&P 500 is a benchmark for one slice of a portfolio rather than for the whole.

Much of what planners know about withdrawal rates rests on S&P 500 history. The 1998 Trinity study, for example, used the index to represent stocks when it tested how long retirement portfolios lasted at different withdrawal rates. Replaying the index’s actual order of good and bad years also exposes sequence of returns risk: a loss in the first years of retirement does far more damage than the same loss a decade later, because withdrawals lock it in. Common mistakes when using the index as a yardstick: