The Fortune 500 is superior for measuring the performance of U.S. large-cap stocks.
Investment professionals have traditionally regarded the Standard & Poor's 500 Index as the best proxy for U.S. large-cap blue-chip stocks. In recent years, however, investors have become increasingly discriminating about the indexes they use to benchmark the performance of particular asset classes. Those seeking a proxy for U.S. large-cap blue-chip stocks have become concerned that the S&P 500's composition and performance have become too volatile to represent a stable segment of U.S. large-cap blue-chip stocks.
In a recent study, we compared and contrasted the composition and performance of the S&P 500 and the Fortune 500 indexes to determine whether one offers a superior alternative for measuring the performance of high-quality, less volatile blue-chip stocks. We reviewed their rules of maintenance and construction, recent composition and historic performance.
We found that the Fortune 500 is superior to the S&P 500 as a benchmark for U.S. large-cap blue-chip stocks. The Fortune 500 index has enjoyed a higher return and lower volatility since its inception, while providing a diverse universe of blue-chip stocks. Furthermore, the S&P 500's composition reflects a rather systematic bias toward companies having more volatile earnings and market capitalization. That may be a root cause for the senior index's higher standard deviation.
Fortune 500 Index
The Fortune 500, introduced on a real-time basis in December 1999, is a capitalization-weighted index that measures the performance of the largest U.S. companies ranked by revenues. The index is derived from the Fortune 500 List, which was introduced in 1955. Each year, the list is compiled from the latest reported financial data as of January 31 through the efforts of teams of reporters, accountants and analysts gathering data, organizing and analyzing the information, and then releasing a list in April each year. The list consists of the 500 largest domestic U.S. companies ranked by total operating revenues, as reported in their latest fiscal year, including revenues from discontinued operations. The revenues for commercial banks and savings institutions are the sum of interest and non-interest revenues. Those for insurance companies include premium and annuity income, investment income, and capital gains or losses, but exclude deposits.
Components for the Fortune 500 are selected from the Fortune 500 List based on four eligibility criteria:
1) A stock must be publicly traded on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market.
2) It must have a minimum average daily trading volume of 100,000 shares during the 25 consecutive trading days preceding initial inclusion.
3) It must have a minimum reported price equal to or in excess of $5 per share during that period.
4) The company must have a minimum market capitalization equal to or in excess of $100 million during that period.