Owning the Market Isn’t As Easy as it Sounds

ETF Database

When most investors think of the U.S. equity market, the S&P 500 is likely what first comes to mind. The legendary benchmark has long been used as a barometer of the broad market, as it represents approximately 80% of available market capitalization. As such, many believe owning the S&P 500 via an ETF is a way for investors to essentially “own the market” [see also  7 Charts to Put the ETF Industry in Perspective ] .

There is, however, some fault to that statement, as the entire U.S. equity market is not represented. Besides the S&P 500, investors have turned to other popular benchmarks to try and capture the market, including the NYSE Composite, Russell 3000, and NASDAQ Composite indexes. In this piece, we take a close look at nine of the “broadest” U.S. indexes, highlighting each index’s composition, biases, and depth:

Index ETF # of Components Top 3 Holdings Top Sector Allocations
S&P 500 SPY 500 Apple (AAPL), Exxon (XOM), Microsoft (MSFT) Information Technology, Financials
S&P 100 OEF 100 Apple (AAPL), Exxon (XOM), Microsoft (MSFT) Information Technology, Financials
NASDAQ Composite ONEQ 2500 Apple (AAPL), Google (GOOG), Microsoft (MSFT) Technology
NASDAQ 100 QQQ 100 Apple (AAPL), Google (GOOG), Microsoft (MSFT) Technology
Dow Jones Industrial Average DIA 30 Visa (V), IBM (IBM), Goldman Sachs (GS) IndustrialsFinancials
Russell 3000 IWV 3000 Apple (AAPL), Exxon (XOM), Microsoft (MSFT) FinancialsTechnology
Russell 1000 IWB 1000 Apple (AAPL), Exxon (XOM), Microsoft (MSFT) FinancialsTechnology
NYSE Composite Index NYC 1867 Exxon (XOM), Johnson & Johnson (JNJ), GE (GE) Financials, Oil & Gas
Wilshire 5000 n/a 5000 Apple (AAPL), Exxon (XOM), Microsoft (MSFT) Consumer StaplesTechnology
S&P 500

This legendary index is designed to focus on the large-cap sector of the market, but since it includes a significant portion of the total value of the market, it is also used as a representation of the U.S. equity market. The market-cap weighted index only includes companies with a market cap greater than $4.6 billion that have reported positive as-reported earnings over the most recent quarter [see Visual History of the S&P 500].

S&P 100

This index is a subset of the S&P 500, measuring the performance of large-cap companies. The index consists of 100 companies selected from the S&P 500. Only those companies considered to be the largest and most stable are included in the index. Because the index is relatively small, sector balance is considered in the selection of the companies. Like the S&P 500, however, the S&P 100 is skewed toward information technology and financial securities.

NASDAQ Composite

This index measures all of the domestic and international stocks listed on the NASDAQ Stock Market. The benchmark includes over 2,500 companies, and is weighted by market cap. Though the index is significantly broader than both the NASDAQ 100 and the S&P 500, it is still skewed towards tech stocks, which account for over 40%.

NASDAQ 100

This index tracks the 100 largest domestic and international non-financial securities listed on the Nasdaq Stock Market, based on market capitalization. To be included in the index, a stock must have a daily trading volume of at least 200,000 shares and must be a “seasoned” stock, meaning it has been trading on NASDAQ for at least two years. As expected, the index is skewed toward tech stocks, which make up over half of the index; consumer services account for over 20%.

Dow Jones Industrial Average

This well known index represents the biggest and most well-known U.S. companies, covering all industries with the exception of transportation and utilities. The index is composed of only 30 stocks, and unlike other indexes on this list, DJIA is price-weighted. In terms of sector weightings, financials and industrials make up more than 40% of the index [see Visual History Of The Dow Jones Industrial Average].

Russell 3000

This index measures the performance of the largest 3,000 U.S. companies, representing an impressive 98% of the investable U.S. stock universe. The index is reconstituted only once a year, and the underlying companies are ranked based on market capitalization. Financial services, technology, and consumer discretionary stocks account for the majority of the index.

Russell 1000

This benchmark measures the performance of the large-cap segment of the U.S. equity market and is a subset of the Russell 3000 Index. The index represents approximately 92% of the total U.S. market. Like the Russell 3000, the index is reconstituted annually and is market capitalization-weighted. Some investors prefer this benchmark over the S&P 500 and Dow as a better large-cap barometer.

NYSE Composite Index

Similar to the NASDAQ Composite, this index measures the performance of all common stocks listed on the NYSE, including ADRs, REITs, and tracking stocks. The index is weighted using free-float market capitalization and is calculated on both price and total return basis. In terms of sector breakdowns, financial equities account for over 20%, while oil & gas stocks account for over 16%.

Wilshire 5000

This index is by far the broadest on this list. The Wilshire 5000 index measures the performance of all U.S. equity securities with readily available price data. Many consider this to be the best measure of the entire U.S. stock market, while others use it for an approximation of dollar changes in the U.S. equity market, as the index’s base is its December 31, 1980 capitalization. Currently, consumer staples represent about 25% of the index, while technology and financials represent over 17% each.

The Bottom Line

Though each of these indexes do capture the broader U.S. market, it is important for investors to realize how each of these popular benchmarks differ, as the composition, size, and sector allocations are quite different. For those wanting to technically “own the market,” the Wilshire 5000 is by far the best option (though there is no ETF option for this yet!). 

Follow me on Twitter @DPylypczak

Disclosure: No positions at time of writing.

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