2) composition;

3) economic-sector diversification;

4) market capitalization: size, range, average and median stocks;

5) performance (returns and risk) .

Consistency And Objectivity

Consistency and objectivity are required to minimize subjective selection biases, such as sector and industry exposure, market cap and so on. Consistency requires that the selection process be implemented in a disciplined manner, regardless of the time period. The standards for inclusion in 1990 should be no different than the standards of inclusion in 2000 or 2010. Objective and unambiguous inclusion criteria make it possible to perform statistically valid back-tests without survivorship bias because all companies that existed at a historical point in time can be measured and selected according to an objective standard.

In the early 1990s, Standard & Poor's attempted to perform a back-test of its new index, the S&P MidCap 400, but had no objective criteria established for selecting stocks that would have been included prior to the base date. Since it had no objective criteria and standards held by committee members varied with time, historical index values for the 400 stocks could not be computed. Instead, historical price data for stocks initially selected were used to measure the index's historical returns for the ten-year period preceding its introduction. However, many of those stocks did not exist for the full ten-year period. In fact, many of them began the back-test period as micro-cap stocks with less than $100 million in market capitalization, issues that never would have been selected for the MidCap index in 1981.

More recently, on July 19, 2002, S&P's Index Selection Committee conducted a major rebalancing of the S&P 500 in an attempt to better capture the U.S. large-cap stock universe. It removed seven non-U.S. domiciled stocks from the index, some of which had been included for decades: Royal Dutch Petroleum, Unilever NV, Nortel Networks, Alcan, Barrick Gold, Placer Dome and Inco. It replaced them with seven large-cap, high-profile stocks, some of which had been ignored for years: United Parcel Service, Goldman Sachs Group, Prudential Financial Group, eBay, Principal Financial Group, Electronic Arts and Sungard Data Systems. One can therefore question whether, prior to the recent rebalancing, the S&P 500 truly represented U.S. large-cap blue-chip stocks.

In contrast, there is little ambiguity or subjectivity in selecting components for the Fortune 500. The list from which they are drawn is objectively determined, requiring only that companies be ranked according to revenues, which are determined by a fixed definition and specific rules. The rules by which components are selected from that list are also rigorously defined and applied, as are the rules for removing a company. In sum, the process of creating the Fortune 500 is both consistent and objective, resulting in a completely transparent index irrespective of the historical point in time it is selected.

Index Composition

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