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Barry Ritholtz

The S&P 500's Dubious Anniversary

The S&P 500's reliance on market valuations was an improvement over price-weighted indexes, but it was far from ideal.
Everyone loves a winner -- while it lasts.

Everyone loves a winner -- while it lasts.

Photographer: Victor J. Blue/Bloomberg

The Standard & Poor's 500 Index is market-capitalization weighted, meaning that companies with higher stock-market valuations have a bigger influence on the index. There has been a cottage industry of criticism about this structure. Recently, it has led to a new world of fundamental indexing and so-called smart beta, or seeking ways of using the components of the index to outperform the index itself.

The S&P 500 wasn't always set up this way. This is a good time to think about the subject, because today marks the anniversary of the index's overhaul, giving us the structure we have now.