S&P 500 Economic Sector Weightings

Investors who follow stock markets are familiar with the Standard & Poor’s 500 Stock Index, which represents about 75% of the total U. S. stock market in terms of dollars invested.  The index, which always includes 500 stocks, is divided into Economic Sectors.  There are 10 Economic Sectors in the index, and each of the 500 stocks is slotted into one of the 10 Economic Sectors.

The Economic Sectors do not have an equal weight.  Their weights change, depending on a couple of things.  First, the relative investment performance of each sector will make the sectors’ weights change over time.  For example, when Financial Services stocks plummeted in value in the fall of 2008 during the financial crisis, and continued on a downward trend after that, this sector’s representation in the index, which had been over 20%, declined to about 10% at their low point.

Secondly, as stocks are added to or subtracted from the index, the new stock may be slotted in a different Economic Sector than the one that was replaced.

The Economic Sectors have the following dollar weights as of Friday, April 21, 2011:

Consumer Durables (autos, home builders, clothing manufacturers) – 10.6%

Consumer Staples (food, laundry detergent, toiletries) – 10.4%

Energy (oil and gas producers, oilfield equipment providers) – 13.1%

Financial (banks, insurance companies, REITs, brokerage firms) – 15.5%

Health Care (major pharmaceutical companies, medical equipment providers) – 11.2%

Industrials (machinery, railroads) – 11.1%

Information Technology (computer hardware, computer software) – 18.2%

Materials (precious metals producers, chemical companies, mining companies) – 3.7%

Telecommunications Services (major telecommunications companies such as Verizon, wireless telecom providers) – 3.0%

Utilities (electric utilities, gas utilities, independent power producers) – 3.2%

Note that the examples in parenthesis are not all of the industries represented; rather, they are a representative sample of the types of companies found in each Economic Sector.

When the Energy sector peaked in the late 1970’s and early 1980’s, Energy represented over 30% of the S&P 500.  When Information Technology peaked in 2000, it, too, represented over 30% of the S&P 500.   So it is pretty safe to say that when a sector reaches almost 1/3 of the S&P 500, it is probably one that is overvalued and due for a fall.

Interestingly, so-called “Index” funds that are intended to provide investment returns similar to that of the S&P 500 Index must invest in these sectors, even if they appear to be overvalued.  These index funds also are probably obliged to hold onto stocks of companies that “everyone knows” is headed for bankruptcy, or is strongly suspected of being headed towards bankruptcy.  Enron, WorldCom and some of the financial stocks that went bust in 2008 come to mind as silly investments for these index funds.

Also, if you invest in an S&P 500 Index Fund, keep in mind that about 13% of your fortunes in this fund are tied to Energy stocks, which are commonly demonized by politicians.  The same is true of Telecommunications Services, Health Care, Food and many other industries that are heavily regulated by Federal or state governments.