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Standard &Poor’s 500 is a stock market index which focuses on the market capitalization of the American 500 large companies. These companies have their stocks listed on the NYSE or in the NASDAQ. S&P 500 is commonly used as a benchmarking tool to determine the overall economy. Investors use S&P 500 to benchmark their individual portfolios although this can result in some challenges for small businesses.
Let’s have a look at the pros and cons of using the S&P 500 as an investment strategy.
1. Broad view: It has a wide market breadth for the large-cap companies which are included in the index. When using it as a benchmark, it can provide you with a broad view of the country’s economic health.
2. High leverage: Investors will use a little amount of capital to control more asset value. Extreme leverage sometimes can lead to a bad trading practice.
3. Tax treatment: Investment in S&P 500 by buying an index future gives you an advantage of tax treatment. You’re able to get 40% of gains that are taxed within a short-term rate and 60% for a long-term rate.
4. Dividends: Once you buy an index ETF in the S&P 500 investment plan, you will receive dividends for your investment in the company after a financial year. You can buy the shares and hold them without rollover to new contracts.
5. Flexible: S&P 500 allows you to invest as little as one share making it possible to have a small account that is more appealing as well as encourages low-income earners to invest.
6. Investment vehicle: Index futures can be used as a long-term investment vehicle which enables your account to handle the daily volatility of contracts earning you more income.
7. Simple investment plan: ETF investment plant is simple, gives you dividends, increases performance, and no need to renew the contract since it doesn’t expire.
8. Performance benchmark: Large companies can rely on S&P 500 to compare their performance against the market peers.
9. Frequent updates: The index components are updated on a quarterly basis providing you with an accurate investment portfolio based on current economic status.
1. Inaccurate measure: Standard & Poor’s 500 is based on large market cap companies and some investors may own a small-cap in their portfolio making it difficult to measure accurate return portfolio for the individual investor.
2. Long-term performance measurement: S&P 500 investment strategy work over the long term, therefore, it’s not possible to measure the company’s portfolio performance over a short period of time.
3. Portfolio benchmark: Although it is good for investors to monitor the portfolio progress of the business, the S&P 500 does not provide a good portfolio benchmark for individual portfolio performance.
4. Commission: The quarterly rollovers need a commission and slippage. This makes it difficult to keep up with the performance for a long period.
5. Large impact on the index: S&P 500 benchmark index is calculated based on large companies and the first 50 companies by market capitalization account for more than half of the index value thus having a large impact on the calculated index.
6. High fees: To compare the company’s portfolio against the market peers may be expensive for the company due to higher fees than the regular index funds available. The management fee can also have an impact on the future value of the company’s portfolio.
7. Restrictions: For your company to be listed in the S&P 500, it must be in operation for six months after the initial public offering (IPO).
8. Weighted market cap: Some stocks influence the performance index. The stock with the largest owner of the index is used to determine the market capitalization thus influencing the index performance.
9. Sector risk: Sectors that are growing in value affect the S&P 500 index. A diversified portfolio can be greatly affected by the risk associated with changes in a particular sector of the economy.