The S&P 500(SNPINDEX: ^GSPC) market index is weighted by market cap. Companies with larger total market values contribute more to the index score.
As a result, the largest American stocks carry the most weight among the S&P 500's members. You probably know all about the top three names, whose weighting adds up to 17.2% of the leading market index's score:
Stock | Market Cap | S&P 500 Weight |
|---|---|---|
Microsoft(NASDAQ: MSFT) | $3.21 trillion | 6.5% |
Apple(NASDAQ: AAPL) | $2.96 trillion | 6% |
Nvidia(NASDAQ: NVDA) | $2.33 trillion | 4.7% |
Data source: Google Finance.
What do these heavy weightings mean?
Simply put, even a small price move in these heavyweight stocks can significantly affect the most popular market tracker.
Let's say Microsoft announces a big win in artificial intelligence (AI) today and the stock price shoots up 10%. How many points would it add to the S&P 500, all by itself?
It's a simple two-step calculation:
- Microsoft accounts for 6.5% of the total index value, which stands at 5,319 at the time of this writing. So I can easily figure out how many S&P 500 points this stock currently represents: 5,319×0.065 = 346 index points.
- So if Microsoft's stock rose 10% today, it would increase its score by 1/10 of the current value. That's roughly 34.6 points.
Of course, a Microsoft move that big would obviously affect other stocks. The calculation above assumes that every S&P 500 component except Microsoft stands absolutely still, so it's an unrealistic thought experiment.
But it's still an interesting one. Together, the three stocks listed above add up to 17.2% of the S&P 500's total index weighting. In other words, any market-moving news nugget in the consumer technology and AI spaces can make a big difference to the S&P 500 score.
In another case of three stock market musketeers, the three largest and most popular exchange-traded funds (ETFs) are all S&P 500 index trackers. So if you want to make a diversified investment in the American stock market as a whole, but with a heavy preference for the largest market caps, any of these top S&P 500 ETFs will fit the bill:
ETF | Net Assets Under Management | Expense Ratio |
|---|---|---|
Vanguard S&P 500 ETF(NYSEMKT: VOO) | $1.08 trillion | 0.03% |
SPDR S&P 500 ETF Trust(NYSEMKT: SPY) | $498 billion | 0.09% |
iShares Core S&P 500 ETF(NYSEMKT: IVV) | $465 billion | 0.03% |
Data collected from each ETF's website on 5/22/2024.
Other alternatives
Cap-weighting is not the only possible weighting for a market index. In an equal-weighted fund or index with about 500 tickers, each stock would account for roughly 0.2% of the total fund price or index score.
In a price-weighted portfolio, like the Dow Jones Industrial Average(DJINDICES: ^DJI) index, none of the stocks above would land in the top 10. Nvidia would be close with a 4.4% weighting, but far behind the highest-priced S&P 500 stock: homebuilder NVR(NYSE: NVR), which trades at $7,510 per share today, far surpassing Nvidia's price of $949 per share.
Image source: Getty Images.
I can't find any ETFs attempting to track the S&P 500 from a price-weighted perspective. If that's what you want to invest in, your best bet is the leading Dow Jones Industrials tracker, SPDR Dow Jones Industrial Average ETF Trust(NYSEMKT: DIA).
There is an equal-weighted S&P 500 ETF available, though. The Invesco S&P 500 Equal Weight ETF(NYSEMKT: RSP) manages a $57.2 billion portfolio with that policy. Its expense ratio stands a little higher at 0.2%, due to the extra work required to apply a different weighting policy on a predefined stock list. It's a tight race, but this fund can outperform the standard S&P 500 trackers from time to time:
RSP total return level; data by YCharts.
But yeah, three of the "Magnificent Seven" tech stocks occupy the three most market-moving spots in the S&P 500 index. In fact, six of the top seven spots belong to this group, with Tesla(NASDAQ: TSLA) landing at the 11th spot. Its market cap has taken a 27% haircut in 2024.
Strategic insights from top stock weightings
Getting a handle on how top stocks like Microsoft, Apple, and Nvidia affect the S&P 500 can really change the game for your investments. The AI boom of 2023 gave a big boost to the S&P 500, thanks to the significant contributions from these top names.
Monitoring these key players is crucial for predicting market movements. While this bull market will eventually conclude, another will inevitably follow. By closely tracking the most influential stocks, you can gain valuable insights into upcoming market trends.
Pick a simple stock screener, rank the stocks by market cap, and delve into the largest names for deeper analysis. I don't recommend market timing, but luck favors the prepared. It can't hurt to stay informed about major market trends.
Alternatively, you can take the simpler route of leaning on index-tracing ETFs instead. Let the index and fund managers do the heavy lifting of staying on top of the latest market trends, while you sit back and enjoy the wealth-building magic of compounding returns in a diversified stock portfolio.
ETFs like the Vanguard S&P 500 ETF are an easy way to tap into the power of these influential stocks while staying broadly invested. If you're looking for something different, you could always go with the Invesco S&P 500 Equal Weight ETF.
Should you invest $1,000 in S&P 500 Index right now?
Before you buy stock in S&P 500 Index, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $635,982!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 13, 2024
Anders Bylund has positions in Nvidia and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Microsoft, NVR, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
