We analyze the 7 most important stock market indexes of the United States, the largest and most liquid capital market in the world.
- S&P 500
- Dow Jones Industrial Average
- Nasdaq Composite
- Nasdaq 100
- Russell 2000
- Wilshire 5000
- MSCI USA
Whether you are interested in analyzing the state of the stock market, or because you want to find the perfect index to invest in through an ETF, being familiar with the indexes of a country is fundamental. And that is especially true when it comes to the United States.
The US stock market accounts for approximately 50% of all global market capitalization. In other words, if we divide the value of all listed companies in the world in two, on one side we would have the United States and, on the other, the rest of the world.
For this reason, the United States has several stock indexes, all of them very important. Each of these indexes represents a different portion of the United States stock market.
The S&P 500 is, without a doubt, the most important stock market index in the United States. Introduced in 1957, it is owned by S&P Dow Jones Indexes.
It is made up of 500 large companies in the United States. This means that it perfectly combines two fundamental characteristics of a stock index: representative of a country and investable.
These 500 companies are a good representation of what is happening, in general, in the US stock market. At the same time, by limiting the number of stocks to 500, we avoid small-cap companies.
The S&P 500 weights companies based on their market capitalization. This means that larger companies have a higher weight in the index. As a result, the 10 largest US companies often account for between 20 and 30 percent of the index’s entire value.
The capitalization of the entire S&P 500 hovers around $30 trillion, roughly twice the size of the US economy. You can find more information about this index on the official website of S&P Dow Jones Indexes.
Dow Jones Industrial Average
The Dow Jones Industrial Average, also known simply as Dow Jones, is the most famous stock index in the world and one of the oldest. Introduced in 1896 with only 12 stocks, it was intended to be a good complement to its sister index, the Dow Jones Transportation Average.
It is currently composed of 30 of the most important companies in the United States. However, there are important distinctions between the Dow Jones and other popular indexes, especially when it comes to their members and how they are weighted within the index.
The 30 companies in the Dow Jones are chosen in such a way that they are representative of the American economy. For this reason, while they are large companies, they are not necessarily the 30 largest companies. In fact, there are relatively small companies compared to others that are not part of the index.
This is because those responsible for the index construction decide which sectors should be represented, and by how many companies, depending on the state of the economy. For this reason, we have seen how in recent years the number of oil companies has decreased, in favor of technology companies, to reflect the changes in the economic landscape.
At the same time, Dow Jones companies are weighted based on their price. This means that the higher a company’s share price, the greater its weight in the index. This ends up leading to the weighting of companies having nothing to do with their total capitalization. For example, Caterpillar has a larger weight than Apple, despite Apple’s market capitalization, revenue and net income being much larger.
That is because, when the index was introduced in the late nineteenth century, calculating an index based on market capitalization was more complicated than calculating it based on stock prices.
Interestingly, none of the original Dow Jones stocks are part of the index today. The company that has been in the index the longest is Procter & Gamble (PG).
Also owned by S&P Dow Jones Indexes, you can find more information on this link.
The Nasdaq Composite is a stock market index that tracks all companies listed on the Nasdaq stock exchange. Because it does not impose a minimum threshold in terms of market capitalization, the Nasdaq Composite contains more than 3000 companies, some of them very small.
For this reason, and despite receiving a lot of attention from the financial press as one of the most important stock indexes in the United States, the Nasdaq Composite is an index in which it is difficult to invest. And, in fact, there are very few ETFs that track it.
Because companies are weighted based on their market capitalization, the 100 largest companies account for more than 90% of the value of the index. Consequently, the index in which we can easily invest is the one we discuss next: the Nasdaq 100.
The Nasdaq Composite tends to be representative of future economic sectors, such as technology, telecommunications and biotechnology.
The Nasdaq 100 is composed of the 100 largest non-financial companies listed on the Nasdaq stock exchange. Often confused with the Nasdaq Composite due to its media coverage, the Nasdaq 100 is usually the index of choice when it comes to passive investing in technology sectors.
Introduced in 1985, it is currently heavily dominated by a small group of companies, in which we would find Apple, Amazon, Alphabet, Tesla, Netflix and Meta.
The Nasdaq 100 has experienced episodes of extreme volatility throughout its history. These include the dot-com bubble, which burst in 2000. The value of the index increased 7-fold between 1995 and 2000. And it fell more than 80% between 2000 and 2009.
You can find more information about the Nasdaq 100 on the official Nasdaq website.
The Russell 2000 is another of the most important stock market indexes in the United States, in this case to analyze what happens to smaller companies, those known as small caps.
It is made up of around 2000 companies, as the name suggests. In fact, the Russell 2000 contains the 2000 smallest companies in the Russell 3000 index, made up of the 3,000 largest companies in the United States.
In other words, these 2000 companies are those that are ranked between 1001 and 3000 in terms of market capitalization. Accordingly, they are the 2000 largest companies in the United States, if we eliminate the top 1000 first.
For this reason, analysts often like to compare the Russell 2000 with the S&P 500. While the Russell represents small companies, the S&P represents large and medium-sized companies.
When people are confident of a strong US economic performance, smaller caps are expected to rise more, so we should see the Russell 2000 outperforming the S&P 500, which is more influenced by the global economy. The S&P 500 should outperform the Russell 2000 in times of low economic growth in the US economy.
The Russell 2000 weights its companies based on their free float-adjusted market capitalization. As a result, we can say that it is dominated by the largest companies within the small cap category.
Introduced in 1984, the Russell 2000 is an index managed by FTSE Russell, a subsidiary of the London Stock Exchange. More information about the Russell 2000 and Russell 3000 indexes can be found on the official FTSE Russell website.
The Wilshire 5000 tries to be the most inclusive stock index of the US stock market. It includes all listed companies in the country that are not considered too small by the index methodology.
Introduced in 1974 and owned by Wilshire, the index owes its name to the fact that, originally, it was composed of about 5000 companies. However, this number is not fixed and has varied greatly throughout history.
In the year 2023, the Wilshire 5000 was composed of roughly 3500 stocks. The highest number of stocks ever reached by the index exceeded 7500 in 1998. However, many companies have disappeared, been absorbed, or become smaller since then.
Many ETF fund providers allow us to invest in the Wilshire 5000, which gives us a very complete exposure to the American stock market.
Companies in the index are weighted based on their free float-adjusted market capitalization. As a result, the Wilshire 5000 is heavily dominated by the same companies that dominate the S&P 500.
You can find more details about it on the official Wilshire website.
Finally, the MSCI USA, calculated by the US company MSCI, is another great option for those who want to invest in the United States stock market passively, given that many ETF providers track it.
The MSCI USA index includes all US stocks that are part of the global stock market index of developed countries MSCI World. The correlation between both indexes is very high because the US makes up about 70% of the total value of the MSCI World.
The number of stocks within the MSCI USA index varies over time, depending on how many meet companies meet the eligibility criteria, especially when it comes to the market capitalization threshold. Nonetheless, the number of stocks tends to hover around 600.
And because companies are weighted based on the market capitalization adjusted for free float, the correlation between the MSCI USA and the S&P 500 is also very high.
You will find additional information on the MSCI website.
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And if you want to learn about the most important stock indexes in Germany, check out the following link:
The 5 Most Important German Stock Market Indices