The most obvious difference between the S&P 500 and the Fortune 500 is that the former always contains 500 issues and the latter fewer issues when it is initially constructed each year. Since the Fortune 500 does not replace components that are removed, it typically will have fewer components by year-end.
The two indexes' monthly total returns from January 1999 through June 2002 are 99.4% correlated, largely from sharing many of the same components. On June 30, 2002, the Fortune 500 shared 331 components with the S&P 500. It also contained 120 components not in the S&P 500, and the S&P contained 169 not in the Fortune 500, suggesting that differences in their composition affect certain performance characteristics, especially revenues and market capitalization.
Their contrasting composition is dramatically illustrated by comparing the operating revenues of the components exclusive to each index. The total revenues of the 120 exclusive Fortune 500 components were $780.1 billion, and their market cap was $417.6 billion on June 30, 2002. They had $1.87 worth of revenues for every $1 of market cap. In sharp contrast, the total revenues of the 169 companies exclusive to the S&P 500 were $653.9 billion with a market cap of $1.076 trillion. They had $0.61 of revenues per $1 of market cap, or only about one-third the value of the corresponding Fortune group.
Figure 1 shows the revenues and market capitalization of each of the 20 smallest components unique to each index. Clearly, even the smallest exclusive components of the Fortune 500 have greater revenues relative to their market cap than the S&P 500's. In fact, the ratio of revenues to market cap is $7.06 to $1 for the Fortune 500's 20 smallest components versus $1.62 to $1 for S&P's. The Fortune 500, therefore, is more clearly tilted toward revenues and the S&P 500 toward market cap. This suggests that larger-cap stocks in the S&P 500 index are possibly more vulnerable to downside corrections than those in the Fortune 500 because they may not have adequate revenues to support their valuations.
Sector Diversification
Despite the high correlation between the monthly total returns of the Fortune 500 and S&P 500 indexes, differences in their constituents give them different sector exposures. These differences are illustrated in Figure 2.
At December 31, 2001, the Fortune 500 had greater exposure to sectors that are traditionally considered more stable: consumer discretionary (15.5%), consumer staples (8.6%), financials (18.7%) and utilities (3.5%). The S&P 500 index, on the other hand, was more concentrated in sectors regarded as more volatile: energy (6.3%), industrials (11.3%), information technology (17.6%) and materials (2.6%). More recently, S&P's market-cap weight in information technology decreased to 13.9%, but the S&P 500 still contains 77 components in this sector. The Fortune 500 has fewer than half that number, with 37 information technology components accounting for 8.2% of the index's market cap. In sum, S&P's selection process appears to favor sectors having greater volatility, while Fortune's process seems to favor those with lower volatility and without a large amount of turnover in components or a change in which sectors are traditionally more volatile. This difference will probably continue.
Market Capitalization
There are also differences between these indexes with respect to their market capitalization. The largest stock in both the S&P and Fortune 500-General Electric-had a market cap of $397.9 billion on December 31, 2001. The stock with the smallest cap, $431 million, is more than twice the Fortune 500's smallest stock with a capitalization of $208 million. There is also a significant difference in their median size, $8.3 billion for the S&P 500's median stock versus $7.7 billion for Fortune's. Fortune's average company had a market cap of $22.5 billion, $1.6 billion greater than S&P's $20.9 billion.
Performance Characteristics